I 

W 

THE  BEVENUE  BILL 


SPEECH 


HON.  JOHN  W.  WEEKS 

OK’  MASSACHUS  ET'i’ .S 


IN  THE 

SENATE  OF  THE  UNITED  STATES 


THURSDAY,  FEBRUARY  22,  1917 


WASHINGTON 

GOVERNMENT*  PRINTING  OFFICE 
1917 

82945— 1705G 


BOSTON  COLLEGE  LIBRARY 

^  CHESTNUT  HILL,  MASS. 


4 


f 


SPEECH 

OF 

HON.  JOHN  W.  WEEKS. 


The  Senate,  as  in  Committee  of  the  Whole,  had  under  consideration 
the  bill  (II.  II.  20573)  to  provide  increased  revenue  to  defray  the  ex¬ 
penses  of  the  increased  appropriations  for  the  Army  and  Navy  and  the 
extensions  of  fortifications,  and  for  other  purposes. 

Mr.  WEEKS.  Mr.  President,  under  ordinary  circumstances 
I  should  not  take  the  time  of  the  Senate  to  discuss  this  bill, 
for  I  presume  that  the  action  taken  by  the  majority  in  their 
caucus  is  to  be  carried  out  on  the  floor,  and  that,  in  a  sense,  it 
may  be  a  waste  of  effort ;  but  I  have  proposed  a  substitute  for 
the  bill,  which  I  think  is  so  preferable  from  the  standpoint  of 
the  taxpayer  that  I  do  not  only  want  to  explain  why  I  am  op¬ 
posed  to  the  pending  legislation,  but  I  wish  also  to  state  my 
reasons  for  suggesting  what  I  consider  to  be  a  better  method 
of  procedure. 

Mr.  President,  this  is  a  period  of  preparedness — military  pre¬ 
paredness.  We  have  appropriated,  are  appropriating  this  year, 
and  will  continue  to  appropriate  large  sums  of  money  for  this 
purpose.  In  order  to  raise  the  necessary  revenue  to  pay  for 
these  unusual  expenditures,  unusual  methods  must  be  adopted; 
and  the  majority  party,  very  largely  at  least,  must  be  responsi¬ 
ble  for  those  methods.  In  the  pending  bill  we  find  the  pos¬ 
sibility  of  raising  revenue,  but  it  is  done  at  the  expense  of 
efficiency,  of  fairness,  and  is  almost  entirely  a  sectional  measure. 

This  is  the  last  period  in  our  history  when  we  should  under¬ 
take  any  course  which  is  going  to  penalize  efficiency.  The 
reports  from  Europe  are  unanimous  that  there  has  been  an 
enormous  increase  in  the  industrial  efficiency  of  those  coun¬ 
tries.  Of  course,  it  is  impossible  to  determine  this  accurately, 
but  we  have  evidence  as  to  what  is  being  done  in  Great  Britain 
and  in  some  other  sections  of  Europe.  The  substance  of  this 
evidence  is  that  the  increase  in  efficiency  in  Great  Britain,  for 
instance,  has  been  GO  per  cent  since  the  beginning  of  the  war, 
notwithstanding  the  fact  that  men  have  practically  been  elimi¬ 
nated  from  manufacturing  establishments  and  their  places 
taken  by  old  men,  boys,  and  women. 

If  an  examination  of  the  industrial  conditions  of  Europe  had 
not  been  made,  we  might  have  reached  the  conclusion — due 
partially  to  the  fact  that  our  exports  are  tremendous — that  the 
manufacturing  industries  of  Europe  were  much  more  seriously 
crippled  than  they  are.  As  a  matter  of  fact,  there  has  not  been 
any  invasion  of  Great  Britain.  Her  industries  are  intact ;  in 
fact,  have  greatly  increased  in  volume  of  production  since  the 
beginning  of  the  war.  There  has  been  no  enemy  on  German 
soil.  Therefore,  the  same  thing  is  undoubtedly  true  of  Germany. 
Practically  speaking,  this  is  the  situation  in  every  manufactur¬ 
ing  European  country,  with  the  exception  of  northern  France, 
2  ~  82045—17056 


« 


39158 


Q 

O 


Belgium.  nml  a  very  small  area  in  Italy  ami  Austria,  and  even 
In  these  invaded  countries  the  greater  part  of  their  manufac¬ 
turing  interests  are  intact  and  have  increased  in  etlicieucy  and 
capacity.  Although  these  nations  are  our  important  customers, 
they  have  always  been  our  rivals  and  are  going  to  he  far  more 
serious  rivals  in  the  future  than  they  have  been  in  the  past. 

In  order  to  demonstrate  the  correctness  of  the  statement  I 
have  made  as  to  the  increased  manufacturing  capacity  of  other 
countries,  I  want  to  bring  these  facts  to  the  attention  of  the 
Senate : 

England  has  produced  and  sold  to  the  world  during  the  12 
mouths  of  191G  goods  to  the  value  of  .$2,405,107,140  as  com¬ 
pared  with  $2,006,100,017  in  1914,  a  gain  of  $309,000,000.  Of 
this  enormous  production  and  shipment,  manufactured  articles 
comprise  practically  two-thirds  of  the  total. 

I  ask  unanimous  consent,  Mr.  President,  to  insert  herewith 
a  table  showing  the  export  from  Great  Britain  in  1914  and  in 
1910  of  articles  wholly  or  partly  manufactured. 

The  VICE  PRESIDENT.  Without  objection,  it  is  so  ordered. 

The  table  referred  to  is  as  follows: 


Export  of  articles  wholly  or  mainly  manufactured. 


1914 


1916 


Iron  and  steel,  and  manufacturers  thereof . 

Other  metals,  and  manufactures  thereof . 

Cutlery,  hardware,  implements  (except  machine  tools) 

and  instruments . . 

Electrical  goods  and  apparatus . . 

Machinery . . 

Ships  (new) . 

Manufactures  of  wood  and  timber . . 

Yarns  and  textile  fabrics; 

Cotton . : . . 

Wool . 

Silk . . 

Other  materials . . 

Apparel . . 

Chemicals,  drugs,  dyes,  and  colors . 

Leather  and  manufactures  thoreof,  including  gloves, 

but  not  boots  and  shoes . 

Earthenware  and  glass . 

Paper . 

Railway  carriages  and  trucks  (not  of  iron),  motor  cars, 

cycles,  etc . 

Miscellaneous . 

Total  export  of  articles . 


$202, 776, 494 
60,043,596 

$275,841,833 

61,905,072 

31,691,708 

14,690,016 

152,028,492 

33,737,274 

7,613,094 

31,298,504 
19,987,814 
98, 455, 981 
6, 280, 583 
6,222,709 

502, 546, 007 
153, 234,189 
9,078,810 
03, 178, 173 
70,718,391 
94,935,978 

570,401,594 
228,243,350 
11, 100, 769 
76,973,439 
81,440,510 
134,083,283 

22,799,024 

20,184,48) 

15,504,371 

23,820,081 

19,063,603 

25,300,651 

54,048, 043 
147,890,277 

39,128,056 

198,035,569 

1,047,960,238 

1,915, 795,570 

Wholly  or  mainly  manufactured— Gain  in  1916  over  1914,  $267,835,332. 

Mr.  WEEKS.  Mr.  President,  it  will  be  seen  that  the  gain  in 
1916  over  1914  in  these  manufactured  products  is  nearly 
$26S,000,000  and  includes  most  of  the  staple  products,  especially 
many  of  those  articles  in  which  Great  Britain  is  in  active  com¬ 
petition  with  this  country.  For  example,  it  shows  an  increase 
of  $74,000,000  in  cotton  fabrics,  $75,000,000  in  woolen  fabrics, 
$11, 000, (XXI  in  wearing  apparel,  $40,000,000  in  chemicals,  and 
$73,000,000  in  iron  and  steel  and  manufactures  thereof. 

Of  course,  it  is  fair  to  state  that  the  difference  in  the  prices 
of  these  goods  at  the  manufacturer’s  door  partially  makes  up 
for  the  increase;  and  comparing  the  British  foreign  trade  of 
1910  with  1915,  which  shows  a  gain  of  £21S,000,000,  and 
82945 — 17050 


# 


4 

reducing  the  cost  to  the  1913  price  snows  that  in  many  articles 
the  volume  of  production  has  not  materially  increased.  Sub¬ 
stantially  speaking,  however,  production  in  England  is  now  at 
its  highest  level,  notwithstanding  the  handicap  under  which 
that  country  has  been  laboring  in  fitting  itself  for  its  military 
necessities. 

To  illustrate  the  kind  of  competition  we  are  likely  to  meet 
in  the  future,  let  us  take  another  country.  During  the  first 
11  months  of  191G  Japan  exported  $300,000,000  of  her  products 
and  imported  $330,000,000,  showing  a  trade  balance  of  prac¬ 
tically  $150,000,000.  During  this  period  exports  of  cotton  yarns 
and  fabrics  showed  an  increase  from  $50,000,000  in  1915  to 
$71,000,000  in  1916.  Matches  increased  two  and  a  half  million 
dollars;  copper,  eight  millions;  and  there  were  very  large  in¬ 
creases  in  the  Japanese  exports  of  hosiery,  much  of  it  finding 
a  place  in  the  American  market.  In  1916,  during  these  11 
months,  Japan  sent  to  the  United  States  goods  to  the  value  of 
$164,822,000  as  compared  with  $97,080,000  the  year  before,  an 
increase  of  $67,000,000,  or  something  like  70  per  cent. 

That,  Mr.  President,  it  seems  to  me,  is  a  fair  indication  of 
the  kind  of  competition  we  will  receive  from  a  nation  which  is 
expanding  tremendously,  which  is  producing  at  very  much  less 
cost  than  we  can  produce,  and  which  is  going  to  be  an  im¬ 
portant  rival  of  our  industries  in  the  future. 

Since  the  beginning  of  the  European  war  we  have  demon¬ 
strated  how  easy  it  is  to  transfer  American  industrial  estab¬ 
lishments  intended  for  manufacturing  commercial  products  into 
plants  for  the  manufacture  of  war  munitions.  The  same  de¬ 
velopment  has  taken  place  in  all  European  countries  and  at 
the  termination  of  hostilities  these  war  industries  will  be  trans¬ 
ferred  to  peace  purposes  with  equal  facility.  This,  in  fact,  is 
the  great  question  which  Congress  should  be  considering  at 
this  time,  and  it  is  especially  important  that  Congress  give 
serious  consideration  to  this  question  when  passing  legislation 
to  raise  revenue.  Instead  of  wasting  time  and  energy  in  enact¬ 
ing  makeshift  legislation  of  a  most  haphazard  character  in¬ 
tended  to  tide  the  Government  over  until  another  year,  it 
should  be  working  out  a  definite  financial  scheme  to  fit  this 
country  to  cope  with  the  commercial  activities  which  will  occur 
immediately  hostilities  cease. 

Protectionists — and  protectionists  include  a  great  majority  of 
the  people  of  this  country,  I  believe — would  prepare  through  the 
adoption  of  a  protective  tariff  to  meet  this  emergency.  Even  if 
it  were  not  paramount  for  us  to  follow  such  a  course,  what 
folly  it  is  for  us  to  adopt  such  an  untried  policy  and  one  which 
is  going  to  be  a  tax  on  efficiency  and  necessitate  enormous  pro¬ 
portional  expenditures  in  collecting  the  revenue  required.  What 
we  should  be  doing  is  studying  every  phase  of  the  European 
situation  and  determining  the  character  of  the  protective  policy 
we  should  adopt.  There  must  be  a  restoration  of  many  of  the 
tariff  rates  which  obtained  in  the  past  if  we  are  going  to  have 
reasonable  protection.  Those  rates  must  be  determined  some¬ 
what  by  the  conditions  developing  as  a  result  of  the  European 
conflict  and  by  the  character  of  the  commercial  conflict  which  is 
to  follow.  No  time  should  be  lost  in  beginning  a  study  of  these 
problems. 

We  need  not  only  to  develop  our  efficiency  and  provide  reason¬ 
able  protection  to  enable  us  to  meet  the  competition  of  our  for- 
82945—17056 


5 


eign  commercial  rivals  at  the  end  of  the  war,  but  we  must  pre¬ 
pare  ourselves  to  face  new  conditions  when  this  "rent  European 
sfrmrirlo  is  over.  For  example,  we  have  several  millions  of  men 
in  tin*  United  States  engaged  in  the  manufacture  of  munitions. 
The  minute  the  war  is  over  their  employment  will  cease  and 
they  will  come  into  competition  with  the  other  workmen  in  the 
United  States.  It  is  probable  that  more  than  30,000,000 — pos¬ 
sibly  40,000,000 — of  men  are  in  the  armies  of  the  European 
countries  at  war  or  engaged  in  t lie  manufacture  of  munitions 
of  war.  They  have  been  taken  from  their  normal  pursuits.  As 
soon  as  the  war  is  over  they  will  return  to  their  employments; 
they  will  find  their  places  occupied  to  some  degree  by  a  new 
element  in  industrial  life,  and  this  element  will  materially  in¬ 
crease  the  competition  for  employment  which  will  exist  in  those 
countries.  As  a  result  of  this  competition  during  the  readjust¬ 
ment  ]>eriod,  it  is  almost  certain  that  the  average  wage  paid  in 
European  countries  will  he  even  lower  than  before  the  Avar. 

Exactly  the  opposite  condition  obtains  in  the  United  States. 
Wages  are  abnormally  high.  A  reduction  in  wage  and  adjust¬ 
ment  to  new  conditions  always  means  that  some  interest  is 
pinched  and  that  many  difficulties  must  he  met  during  the  re¬ 
adjustment  period.  Moreover,  European  countries  are  going  to 
he  poor.  Poverty  docs  not  promote  tlie  purchase  of  products. 
You  can  only  sell  to  those  who  have  money  to  buy ;  and  we 
should  not  for  a  moment  be  deceived  by  the  specious  story  that 
European  nations  are  going  to  need  many  of  our  products  to 
rehabilitate  themselves  because  of  the  destruction  which  has 
taken  place.  As  I  have  suggested,  this  destruction  has  been 
confined  to  a  very  limited  area.  It  will  take  a  long  time  to  re¬ 
place  it,  but  the  replacement  is  going  to  be  carried  on  by  the 
people  at  home.  In  any  event,  they  will  not  have  the  ready 
money  to  rehabilitate  themselves  immediately,  and  I  predict 
that  the  purchasing  power  of  Europe  will  be  found  to  be  ma¬ 
terially  lower  than  it  was  before  the  war. 

We  are  going  to  find  ourselves  the  great  rich  Nation  of  the 
world.  We  are  going  to  be  able  to  buy  the  products  of  others; 
they  can  not  buy  ours,  and  unless  we  erect  an  artificial  barrier 
to  protect  our  interests  we  arc  going  to  face  enormous  importa¬ 
tions  of  goods. 

Then  there  is  another  phase  of  this  question  which  we  must 
not  overlook.  Whatever  the  final  action  taken  may  be,  it  is  be¬ 
yond  question  that  the  countries  of  Europe  are  seriously  con¬ 
sidering  trade  alliances  which  will  make  scraps  of  paper  of  our 
commercial  treaties  and  will  place  a  further  handicap  on  our 
export  trade  to  them.  Last  year  there  was  held  in  Paris  what 
was  known  as  the  Paris  Economic  Conference.  At  this  con¬ 
ference  a  scheme  was  proposed,  seriously  discussed,  and  re¬ 
ported  to  the  allied  nations  which,  in  effect,  substantially  meant 
free  trade  between  the  allied  countries,  a  rate  of  duty  of  con¬ 
siderable  magnitude  between  tlie  allies  and  countries  which  are 
now  neutral,  and  a  higher  rate  of  duty  imposed  against  the 
central  powers.  It  has  been  reported  that  a  similar  arrange¬ 
ment  was  being  considered  by  the  central  powers. 

Moreover,  the  Scandinavian  countries,  including  Holland  and 
Denmark,  have  recently  had  a  conference  to  consider  this  gen¬ 
eral  question,  and  especially  a  proposal  to  protect  the  interests 
of  the  neutral  powers  after  the  Avar.  It  is  worth  noting  that 
82045—17050 


6 


the  United  States  was  not  invited  to  take  part  in  the  Paris 
economic  conference.  It  was,  however,  invited  to  join  the  con¬ 
ference  of  the  neutral  powers.  Whatever  may  be  the  final  out¬ 
come  of  these  proposed  trade  alliances,  trade  conditions  after 
the  war  are  going  to  differ  from  those  of  the  past. 

Our  greatest  export  market  has  been  in  Great  Britain.  It 
has  substantially  been  a  free-trade  market.  There  is  no  doubt 
about  the  adoption  of  a  protective  policy  by  Great  Britain,  to 
some  degree  at  least,  and  this  fact  is  demonstrated  by  instances 
rather  than  settled  action.  Not  long  ago  the  trade-unions  of 
Great  Britain  in  an  annual  convention  or  conference  of  first 
importance  voted  practically  unanimously  in  favor  of  the  adop¬ 
tion  of  a  protective  policy,  and  that  represents  the  sentiment  of 
substantially  two  and  a  half  millions  trade-union  laborers. 
There  is  also  a  very  large  element  in  Parliament  favorable  to 
this  action. 

The  point  I  wish  to  particularly  emphasize  is  that  we  are 
going  to  face  unusual  conditions  after  the  war;  the  solution  of 
the  problems  arising  at  that  time  will  require  the  wisest  states¬ 
manship,  and  we  should  now  be  preparing  ourselves  to  meet 
them.  Notwithstanding  these  probabilities — almost  certainties — 
no  action  has  been  taken  by  the  Democratic  Party  to  indicate  it 
has  given  the  subject  the  slightest  consideration.  No  tax  levied 
or  law  proposed  since  the  beginning  of  the  European  war  would 
lead  to  the  conclusion  that  those  who  compose  the  majority 
have  any  thought  for  this  phase  of  the  future. 

On  the  other  hand,  just  before  the  war  a  law  was  enacted 
lowering  the  tariff  to  one-lialf  the  average  rate  imposed  under 
the  lowest  tariff  law  we  have  ever  had  on  our  statute  books,  and 
under  which  nearly  70  per  cent  of  our  imports  come  in  free. 
Few  people  stop  to  consider  that  we  are  enjoying  at  this  time 
in  the  war  the  benefits  of  a  protection  as  important  in  its  oper¬ 
ation  as  any  law  we  have  ever  passed.  We  are  unable  to  obtain 
any  importations  from  the  central  powers,  or  material  importa¬ 
tions  from  many  other  countries,  and  yet  we  are  importing  a 
larger  volume  of  goods  than  ever  before.  People  should  not  be 
deceived  in  the  slightest  degree  by  our  large  foreign  trade,  for 
the  most  cursory  investigation  shows  that  this  trade  is  incident 
to  the  war  and  originates  in  those  sections  producing  war  mate¬ 
rials.  Of  course  these  exports  are  not  entirely  confined  to  war 
materials;  they  include  very  many  fabrics  and  articles  used 
during  war  and  for  which  there  will  be  no  demand  when  the 
war  is  over.  Without  going  into  detail,  it  is  difficult  to  compre¬ 
hend  the  enormous  supplies  of  such  articles  as  woolen  blankets, 
material  for  uniforms,  shoes,  cotton  fabrics,  and  incidentally 
almost  every  kind  of  manufacture  in  which  our  people  are  en¬ 
gaged  which  go  to  make  up  the  immense  volume  of  exports  we 
are  now  shipping  abroad  and  which  will  cease  when  the  war 
terminates. 

On  September  4,  1914,  the  President  called  the  attention  of 
Congress  to  the  fact  that  the  customs  receipts  for  the  month  of 
August  were  ten  millions  less  than  the  month  of  August,  1913, 
saying  that  the  loss  was  almost  entirely  due  to  the  war  in 
Europe  and  not  to  a  change  in  our  tariff  law.  Customs  receipts 
for  August,  1914,  were  about  $19,000,000.  In  August,  1913,  under 
a  Republican  tariff  law  they  had  exceeded  $30,000,000.  This 
falling  off  in  revenues  commenced  earlier  in  the  year  of  1914. 

82045— 17056 


7 


In  February,  for  example,  tlio  customs  receipts  were  about 
$17,000,000,  or  $2,000,000  less  than  the  month  of  August.  For 
the  eight  months  prior  to  the  war  customs  receipts  averaged 
$22,200,000  a  month,  while  for  the  corresponding  months  in 
1913  they  averaged  $30,934,000.  or  a  difference  of  $8,700,000  a 
month.  It  is  not  denied  that  this  falling  off  in  customs  receipts 
was  due  to  the  decrease  in  rates  of  duty  and  not  to  a  lessening 
in  the  importations. 

During  the  calendar  year  ending  December  31,  1916,  our  im¬ 
ports  aggregated  $2,391,716,000.  If  the  rates  of  duty  which 
obtained  under  the  Payne- Aldrich  law  had  been  in  operation  in 
1910 — during  the  life  of  that  law  the  average  ad  valorem  duty 
was  19$  per  cent — there  would  have  been  added  to  the  Treasury 
through  customs  receipts  $467,940,000  since  the  Underwood- 
Siminons  law  took  effect,  which  would  have  practically  paid  for 
the  extraordinary  expenditures  which  have  been  made  up  to 
this  time. 

At  this  time  if  we  would  enact  a  reasonable  protective-tariff 
law  and  issue  bonds  to  provide  for  our  military  preparations  we 
could  repeal  the  war-revenue  tax,  the  income  tax,  the  corpora¬ 
tion  tax,  the  inheritance  tax,  and  not  pass  this  proposed  excess- 
profits  tax,  and  still  have  sufficient  revenue  to  meet  the  actual 
needs  of  Government,  imposing  such  taxes  as  those  to  which  I 
have  just  referred  in  time  of  unusual  need  and  reserve  them 
for  that  purpose.  In  the  meantime  we  should  leave  to  the 
States  these  means  untrammeled  in  providing  for  their  own 
revenue;  in  other  words,  if  you  ask  how  the  Republican  Party 
would  provide  for  this  situation  we  would  reply,  we  would  im¬ 
pose  a  suitably  protective  tariff  law  and  provide  for  unusual 
demands  on  the  Government  through  a  bond  issue,  with  stringent 
provisions  for  its  elimination  within  a  reasonable  period  of  time. 

This  brief  summary  I  have  given  of  the  probable  situation 
which  will  confront  us  at  the  end  of  the  war,  it  seems  to  me,  is 
sufficient  to  show  the  desirability  and  necessity  of  adopting  a 
permanent  and  systematic  policy  of  taxation  rather  than  levy¬ 
ing  special  direct  taxes. 

There  can  be  no  difference  of  opinion  as  to  the  necessity  of  ad¬ 
ditional  legislation  to  finance  the  Government.  Notwithstanding 
the  imposition  of  corporation  taxes,  income  taxes,  inheritance 
taxes,  and  war-revenue  taxes,  we  find  the  ready  resources  of  the 
Government  at  a  lower  ebb  than  they  have  ever  been  since  the 
Civil  War;  in  fact,  if  the  condition  of  the  Treasury  were  fully 
appreciated  and  we  were  not  in  the  midst  of  a  period  of  business 
activity  in  many  lines  which  has  been  reflected  in  most  direc¬ 
tions,  it  would  produce  a  financial  panic.  This  is  due  to  ineffec¬ 
tive  tariff  legislation,  unusual  appropriations  for  military  pur¬ 
poses,  and  an  accumulation  of  harebrained  schemes  which  the 
majority  party  have  foisted  on  the  country. 

Recent  discussions  in  the  Senate,  even  those  of  yesterday, 
illustrate  the  condition  in  which  we  find  ourselves.  It  is  re¬ 
grettable  to  have  to  say  that  there  seems  to  be  no  concerted 
action  to  promote  reasonable  economy  or  conserve  the  best 
interests  of  our  people,  and  I  want  to  demonstrate  to  the 
Senate  the  deplorable  condition  of  the  Treasury. 

The  daily  Treasury  statement  of  Saturday,  February  17,  1917, 
shows  a  working  balance  in  the  general  fund  of  $70,736,613.82. 

82045—17050 


8 


There  1ms  been  deposited  to  that  date  in  this  fund  the  sum  of 
$48,128,727  for  the  retirement  of  outstanding  national  bank 
and  Federal  reserve  bank  notes  that  have  been  assumed  by  the 
United  States.  If  that  sum  be  deducted  the  amount  remaining 
is  $22,607,8S6.5S.  The  sum  of  $6G, 485, 461.85  has  been  placed  to 
the  credit  of  disbursing  officers  and  was  subject  to  their  checks 
to  the  full  amount,  so  that  instead  of  a  general  fund  in  the 
Treasury  of  $70,736,613.82  on  February  17,  1917,  there  was  in 
reality  a  deficit  of  $43,877,575.27. 

It  is  hard  to  take  the  view  of  the  Secretary  of  the  Treasury 
that  this  forty-odd  millions  paid  in  by  banks  to  take  care  of 
retiring  circulation,  constituting  a  demand  obligation  on  the 
general  fund,  is  not  a  liability  but  considered  as  available  funds 
to  meet  any  other  general  expense.  It  is  especially  difficult  to 
become  reconciled  to  this  position  of  the  Secretary  in  this  mat¬ 
ter,  when  in  his  annual  report  for  the  year  ending  June  30, 
1916,  in  his  statement  of  the  condition  of  the  general  fund,  the 
item  of  money  deposited  by  banks  to  retire  circulation — aside 
from  the  5  per  cent — is  neither  carried  as  a  liability  nor  is  there 
anything  to  show  it  as  being  included  in  the  balance  of  the  gen¬ 
eral  fund ;  but,  on  the  other  hand,  it  is  found  as  an  item  in  the 
statement  of  “  Public  debt.” 

The  Secretary,  in  referring  to  the  deposits  to  the  credit  of 
disbursing  officers,  states: 

These  disbursing  officers'  balances  consist  of  amounts  placed  by  the 
Secretary  of  the  Treasury  to  the  credit  of  disbursing  officers,  against 
which  they  are  authorized  to  draw  checks  in  payment  of  public  obliga¬ 
tions.  *  *  *  As  a  matter  of  fact,  money  in  many  instances  is  not 

spent  for  months,  and  sometimes  not  at  all,  being  returned  to  the  Sec¬ 
retary’s  account.  *  *  *  Funds  are  placed  to  the  credit  oT  disburs¬ 

ing  officers  practically  as  a  bookkeeping  arrangement. 

The  “  public  obligations  ”  referred  to  by  the  Secretary  are,  of 
course,  already  incurred  and  due,  or  are  maturing,  and  it  would 
seem  unreasonable  to  take  for  granted  that  deposits  would  be 
made  with  disbursing  agents  without  immediate  or  near  demand 
for  such  funds  to  cover  these  obligations.  Should  the  Secretary 
for  any  reason  after  making  these  deposits  conclude  to  order 
balances  with  disbursing  officers  remitted  to  the  Treasury — say, 
30,  60,  or  90  days  after  the  date  of  such  deposits — the  probabili¬ 
ties  are  strong  that  such  order  would  be  complied  with  by  dis¬ 
bursing  officers  by  filing  statements,  accompanied  with  vouchers 
and  other  evidence  of  payments,  instead  of  transferring  actual 
money.  It  would  be  true  also  that  the  longer  disbursing  officers 
withhold  statements  covering  expenditures,  the  greater  would 
be  the  fictitious  portion  of  the  balance  represented  by  these 
credits  in  the  general  funds  apparently  available,  as  shown  by 
published  statement. 

The  condition  of  the  Treasury  and  the  expenditures  of  the 
Government  are  more  clearly  demonstrated,  perhaps,  by  making 
comparisons  with  the  past  than  in  any  other  way.  We  look 
back  to  the  Civil  War  period  with  the  feeling  that  at  the  time 
our  armies  were  the  largest  in  our  history,  when  probably  we 
had  a  million  men  in  the  field,  this  country  had  to  face  enor¬ 
mous  expenditures.  That  is  true;  and  yet,  compared  with  the 
expenditures  of  to-day,  with  the  exception  of  one  year,  they 
were  almost  trivial.  I  think  it  fair  to  say  that  the  appropria¬ 
tions  for  this  year  will  aggregate  as  much  as  $1,750, (XX), 000.  I 
have  not  the  exact  figures  before  me. 

82945—17056 


9 


I  wish  to  direct  your  attention  to  the  expenditures  during  the 
Civil  Wnr  period.  Exclusive  of  postal  deficiencies,  as  there 
wore  in  those  years,  the  total  expenditures  of  the  Government  in 
1861  were  $(51,000,000;  in  1S62.  $466,000,000;  in  18(33,  $717,000- 
000;  in  1864,  $863,000,000;  in  I860.  $1,294,000,000;  and  in  1SG6, 
$519,000,000.  Even  in  the  year  I860,  when  the  expenditures 
were  60  j>er  cent  more  than  in  any  other  year  of  the  Civil  War 
and  provision  was  being  made  for  at  least  a  million  men  In  the 
field,  we  were  not  spending  very  much  more  than  two-thirds  of 
the  expenditures  for  the  fiscal  year. 

The  highest  expenditures  made  for  our  Navy,  when  we  were 
blockading  the  whole  coast  of  the  Confederacy,  during  any  one 
year  was  $122,000,000,  and  yet  the  naval  appropriation  bill 
which  is  about  to  be  taken  up  will  appropriate  in  the  aggre¬ 
gate  $531,000,000 — more  than  four  times  as  much  as  we  spent 
for  naval  purposes  in  any  year  during  the  Civil  War. 

No  annual  expenditure  of  the  Government  before  1S90,  exclu¬ 
sive  of  expenditures  for  postal  purposes,  exceeded  $400,000,000. 
At  that  time,  you  will  remember,  there  was  a  great  cry  against 
the  large  expenditures  of  the  Government,  and  Mr.  Speaker 
Itecd,  when  criticized  for  his  leadership  of  a  Congress  which 
had  appropriated  a  billion  dollars,  or  $500,000,000  a  year,  re¬ 
plied  that  it  was  a  billion-dollar  country.  Yet  we  are  appro¬ 
priating  very  nearly  four  times  as  much  as  we  did  26  years  ago. 

The  expenditures  during  the  Spanish  War,  when  we  had  a 
considerable  Army  in  the  field  and  bought  a  great  amount  of 
new  material,  did  not  aggregate  in  any  one  year  one-half  the 
amount  we  are  appropriating  this  year  for  general  expenses. 

EXCESS-ritOFlTS  TAX. 

The  excess-profits  tax  proposed  in  this  bill  is  unique  in  the 
history  of  taxation.  I  can  not  find  any  record  of  the  imposi¬ 
tion  of  such  a  tax  in  time  of  peace  or  war.  It  is  a  tax  upon 
business;  and  yet,  it  does  not  tax  all  business,  only  that  con¬ 
ducted  by  corporations  and  partnerships.  It  is  not  a  tax  upon 
the  magnitude  but  essentially  upon  the  economy  of  operation. 
It  is  not  a  tax  on  large  capital ;  it  may  apply  with  equal  force 
to  men  of  small  capital.  As  its  provisions  would  tax  the  cor¬ 
poration  and  partnership  differently,  it  will  tend  to  drive  the 
partnerships  into  a  corporation.  As  it  taxes  partnerships  or  cor¬ 
porations  and  does  not  tax  the  individual  conducting  the  same 
kind  of  business,  it  will  have  a  tendency  to  prevent  the  suc¬ 
cessful  individual  giving  those  who  have  been  his  employees  an 
opportunity  to  become  interested  in  the  direct  profits  of  the 
business  which  their  industry  and  capacity  have  helped  to  de¬ 
velop. 

This  provision  of  the  bill  seems  to  imply  that  the  Democratic 
Party  believes  S  per  cent  is  a  sufficient  profit  and  that  anyone 
receiving  more  than  8  per  cent  should  be  taxed — no,  not  ex¬ 
actly  taxed,  but  should  have  some  part  of  his  profit  confiscated 
for  the  purposes  of  government.  Perhaps  if  we  were  entering 
upon  a  policy  of  controlling  industrial  action,  including  the 
rates  of  returns  paid  to  those  furnishing  the  capital,  we  might 
conclude  that  8  per  cent  would  be  a  sufficient  average  return; 
but  anyoue  who  knows  anything  about  business  will  testify 
to  the  great  irregularity  resulting  in  every  industry.  There 
82945— 1705G - 2 


10 


are  years  of  plenty  and  years  of  almost  complete  failure. 
In  the  years  of  plenty,  the  frugal  and  prudent  producer  lays 
aside  a  part  of  his  earnings  for  the  development  of  his  plant, 
the  improvement  of  his  machinery,  for  any  other  purpose  which 
will  promote  the  efficiency  of  his  undertaking,  in  order  to  en¬ 
able  him  to  maintain  some  payment  on  the  capital  invested  in 
years  when  a  return  is  not  earned.  It  is  of  vital  importance 
to  an  industry  to  be  able  to  pay  regular  dividends.  There 
have  become  a  great  number  of  investors  in  this  country  who 
depend  partially  or  wholly  on  the  income  they  receive.  They 
will  not  put  their  money  into  an  industry  wTliicli  pays  large 
dividends  one  year  and  does  not  pay  any  for  three  or  four 
years,  as  would  be  the  result  if  the  manager,  lacking  in  pru¬ 
dence,  were  to  pay  out  all  of  his  earnings  one  year;  but  if  he 
does  provide  for  the  condition  I  have  described  the  Govern¬ 
ment  comes  along  and  seizes  a  part  of  the  money  which  really 
belongs  to  the  investors  in  the  enterprise  in  bad  years  and  ap¬ 
plies  it  to  governmental  purposes.  It  is  a  short-sighted  and 
unfair  method  of  procedure. 

If  you  can  take  8  per  cent,  why  not  take  10  per  cent,  or  20 
or  30?  Is  that  going  to  be  the  policy  of  the  Democratic  Party? 
Are  we  going  to  have  continued  the  extravagance  of  the  past 
three  or  four  years — appropriations  for  purposes  like  the  Ship¬ 
ping  Board,  the  nitrate  plant,  the  armor-making  plant,  and 
other  similar  schemes  which  every  trained  and  prudent  business 
man  knows  should  not  be  made,  and  then  seize  by  actual  confis¬ 
cation  the  property  of  our  citizens  to  supply  such  facilities  and 
go  into  competition  with  them?  Is  that  going  to  be  the  policy 
of  the  Democratic  Party?  If  so,  as  soon  as  it  penetrates  the 
public  understanding  there  will  be  a  revulsion  of  feeling  which 
will  destroy  the  ascendancy  of  a  party  inaugurating  it. 

You  have  already  established  an  income  tax,  so  unfairly 
levied  that  it  imposes  a  very  large  burden  on  a  comparatively 
few  citizens.  You  have  increased  the  income  tax  once  since  the 
original  lawT  was  passed.  You  have  imposed  an  inheritance  tax 
in  competition  with  our  own  States,  which  have  depended  on 
both  of  these  forms  of  taxation  to  obtain  necessary  revenue. 
In  this  bill  you  propose  to  increase  the  inheritance  tax.  You 
are  now  establishing  this  excess-profits  tax.  Are  you  going  to 
increase  it  if  you  need  more  revenue?  That  is  a  question  of 
vital  importance  to  the  American  business  man  and  will  deter¬ 
mine  the  kind  of  business  he  does  and  the  manner  of  conducting 
it.  If  you  are  going  to  establish  an  8  per  cent  limit  as  a  fair 
profit  resulting  from  the  conduct  of  business,  why  not  insist 
that  any  concern  earning  more  than  8  per  cent  shall  contribute 
to  the  losses  of  some  other  industry  not  making  8  per  cent? 
Why  not  provide  that  no  man  shall,  through  his  energy  and 
brains,  develop  a  better  business  than  a  less  efficient  competi¬ 
tor?  There  can  be  no  other  result  if  such  a  policy  as  is  con¬ 
tained  in  this  bill  is  adopted.  The  whole  course  of  this  legisla¬ 
tion  is  going  to  adversely  affect  American  progress,  discourage 
efficiency,  and  in  the  long  run  reduce  American  wages. 

I  am  going  to  give  a  few  illustrations  of  the  effect  of  the 
application  of  this  proposed  law,  and  I  think  they  will  fairly 
demonstrate  the  contention  I  make  that  the  bill  is  unfair ;  that 
it  is  sectional ;  that  it  does  not  apply  with  the  same  force  to  the 
82945—17056 


11 


wealth  of  the  country  as  it  does  to  the  efficiency  of  the  country ; 
ami  that  from  every  standpoint  it  will  he  vicious  in  its  results. 

(1)  The  bill  is  objectionable  because  it  is  class  legislation. 
The  incomes  derived  from  agriculture  and  from  personal  service 
are  to  be  exempt.  Thus,  a  wealthy  farmer  or  a  professional 
man  who  may  be  a  lawyer  receiving  large  fees  escapes  alto¬ 
gether. 

(2)  Although  there  is  a  flat  exemption  of  $0,000,  there  would 
still  be  many  partnerships  or  close  corporations  upon  which  this 
tax  would  be  a  burden,  for  in  many  cases  the  capital  invested 
may  be  small,  the  business  having  been  built  up  entirely  by 
personal  effort. 

(3)  Capital  investment  is  defined  as  actual  money  paid  in  and 
actual  property  owned,  together  with  undivided  surplus.  To 
ascertain  this  would  involve  great  difficulty  in  some  cases  and 
would  probably  necessitate  governmental  inspection.  The  latter 
would  be  another  step  toward  centralization.  In  short,  the 
doctrine  of  “  the  less  government  the  better  ”  under  Democratic 
rule  is  being  thrown  to  the  winds. 

(4)  The  legislation  is  punitive  in  effect.  It  is  leveled  at  the 
profits  of  business,  at  the  effective  results  of  capital  ami  sur¬ 
plus.  It  is  a  tax  upon  the  efficiency  of  the  Nation. 

(5)  In  theory  an  income  tax  is  an  ideal  one,  because  the 
fundamental  idea  upon  which  it  is  founded  is  that  taxation 
should  be  imposed  according  to  ability  to  pay.  But  there  should 
be  as  nearly  as  practicable  equality  of  sacrifice  among  the  tax¬ 
payers,  and  a  tax  levied  at  a  uniform  rate  can  not  produce 
equality  of  sacrifice. 

The  proposed  law  is  in  effect  an  income  tax  possessing  some 
of  the  vices  and  few  of  the  merits  which  that  form  of  direct  tax 
contains.  The  only  sound  income  tax  is  one  which  reaches 
everyone  in  a  proportionate  degree. 

The  basis  upon  which  the  8  per  cent  of  excess  profits  is  pro¬ 
posed  to  be  allowed  is  unfair.  That  basis  is  not  the  present 
value  of  the  property  of  a  partnership  or  a  corporation,  but  the 
value  of  the  property  at  the  time  it  was  transferred  to  tlio  part¬ 
nership  or  corporation.  If,  for  example,  two  men  became 
partners  20  years  ago  and  contributed  to  the  partnership 
$10,000  each,  making  a  total  original  contribution  of  $20,000, 
by  the  ability  and  industry  of  those  two  partners  that  business 
might  to-day  be  worth  $1,000,000.  They  would  not  be  allowed 
8  per  cent  upon  the  present  value  of  their  business  or  plant  of 
$1,000,000,  but  only  8  per  cent  upon  the  money  originally  con¬ 
tributed,  or  on  the  property  at  its  value  when  originally  trans¬ 
ferred  to  the  partnership;  in  the  case  I  have  supposed  that 
would  be  8  per  cent  upon  $20,000. 

In  a  word,  the  excess-profit  feature  of  this  bill  is  unfair  for 
the  following  reasons : 

1.  It  is  discriminatory. 

2.  It  is  unfair. 

3.  It  will  discourage  initiative;  it  will  prevent  development 
of  resources  and  industries. 

4.  It  will  favor  certain  classes  or  groups. 

5.  It  will  cause  great  confusion  in  its  interpretation. 

G.  It  fixes  an  arbitrary  cash  basis  of  value  which,  under  the 
capital-stock  tax  rulings,  is  unsound  and  unreasonable. 

82945— 1705G 


12 


NATIONAL  INDUSTRIAL  CONFERENCE. 

A  conference  of  industrial  managers  of  some  of  the  largest 
and  most  important  enterprises  in  the  United  States  has  re¬ 
cently  been  established.  This  conference  was  originated  and 
meetings  held  for  the  purpose  of  discussing  trade  relationships 
and  the  best  and  most  effective  means  of  developing  our  effi¬ 
ciency  and  capacity  to  successfully  compete  with  the  industries 
of  the  world.  A  short  time  ago  this  industrial  conference  board 
wrote  to  the  Finance  Committee  of  the  Senate  making  some 
comments  on  the  bill  under  consideration,  and  I  wish  to  put 
this  communication  in  the  Record  in  its  entirety,  because  it  is  a 
calm,  dispassionate  discussion  of  this  question. 

The  PRESIDING  OFFICER  (Mr.  Hughes  in  the  chair). 
Without  objection  it  is  so  ordered. 

The  matter  referred  to  is  as  follows : 

Februart  10,  1017. 

To  the  honorabie  the  Finance  Committee  of  the  United  States  Senate, 

Washington,  D.  C. 

Gentlemen  :  The  National  Industrial  Conference  Board,  composed 
of  14  national  associations  of  industrial  employers  who  are  jointly 
studying  and  investigating  important  questions  which  have  a  hearing 
on  industrial  development  and  the  conduct  of  business,  to  wit :  Ameri¬ 
can  Cotton  Manufacturers’  Association,  American  Paper  and  Puip 
Association,  Electrical  Manufacturers  Club,  National  Association  of  Cot¬ 
ton  Manufacturers,  National  Association  of  Manufacturers,  National 
Association  of  Wool  Manufacturers,  National  Boot  and  Shoe  Manufac¬ 
turers’  Association,  National  Founders’  Association,  National  Metal 
Erectors’  Association,  National  Founders’  Association,  National  Metal 
Trades  Association,  Rubber  Club  of  America,  Silk  Association  of 
America,  and  United  Typothet®  and  Franklin  Clubs  of  America,  begs 
leave  to  submit  herewith  the  following  observations  and  criticisms  in 
regard  to  the  excess-profit  tax  feature  of  the  pending  revenue  bill, 
H.  R.  20573: 

The  board  realizes  the  propriety  of  taxing  corporate  income.  It  ad¬ 
mits  the  necessity  of  largely  increased  national  revenues  if  the  Nation 
is  to  be  placed  in  condition  for  national  defense.  It  believes  that  rep¬ 
resentatives  of  national  business  interests  should  not  and  will  not  ob¬ 
ject  to  any  fair  tax,  however  heavy,  which  is  necessary  for  national 
defense,  but  it  believes  it  to  be  a  duty  not  less  than  a  right  to  object 
to  the  impractical,  arbitrary,  and  discriminating  form  in  which  the 
proposed  measure  is  cast.  The  pending  proposal  represents  a  growing 
tendency  to  exempt  a  great  mass  of  citizens  who  arc  well  able  to 
contribute,  from  the  pecuniary  burden  of  government.  When  the  na¬ 
tions  of  the  world  are  demanding  universal  service,  our  own  country 
ought  not  to  inaugurate  a  system  in  which  nine-tenths  of  the  popula¬ 
tion  are  deliberately  relieved  from  any  direct  and  proportionate  con¬ 
tribution  to  the  national  revenue.  The  larger  the  revenue  required,  the 
broader  should  be  the  base  of  taxation. 

The  excess-profits  tax  appears  to  us  seriously  objectionable,  because — 

1.  It  is  discriminatory.  It  arbitrarily  and  invidiously  discriminates 
against  all  forms  of  business  done  in  corporate  as  distinguished  from 
individual  capacity,  although  individuals  come  into  competition  with 
corporations.  It  also  deliberately  exempts  partnership  profits  derived 
from  the  great  industry  of  agriculture. 

2.  It  is  a  disproportionate  burden  upon  business  done  in  corporate 
form.  The  present  State  taxes  upon  corporate  property  average  for 
the  several  States  not  less  than  21  per  cent.  With  the  enactment  of 
this  measure  the  Federal  tax  upon  income  from  this  same  property  will 
approximate  2  per  cent.  It  will  also  twice  tax  corporate  income  de¬ 
rived  from  holdings  in  other  corporations. 

3.  It  will  operate  unfairly  and  against  the  principles  of  good  busi¬ 
ness  in  that  it  is  levied  upon  nominal  present  profit  without  regard  to 
the  losses  of  past  lean  years  or  the  prospective  losses  of  lean  years  to 
come.  Good  business  requires  that  unusual  profits  of  cne  period  be 
used  to  equalize  the  losses  of  others.  When  thus  equalized,  the  excess 
profit  of  a  certain  period  which  has  been  taxed  may  be  wiped  out  alto¬ 
gether  and  the  business  even  show  a  loss. 

4.  It  invades  the  legitimate  field  of  State  taxation.  The  continued 
use  of  direct  taxation  and  the  ignoring  of  its  exclusive  field  of  indirect 

82945—17050 


13 


taxation  by  thr  Federal  Government  steadily  increases  the  difficulty  of  the 
States  In  raising  necessary  revenue.  The  report  of  the  New  York  State 
Tax  Commission  for  1915  shows  that  there  have  been  but  5  years  in  the 
preceding  25-y<  ar  period  when  It  was  not  necessary  for  the  State  to 
levy  direct  taxes.  A  proposal  is  now  pending  before  its  legislature 
to  levy  an  income  tax  upon  eeneral  corporations.  Such  a  tax  is  now 
in  force  in  Wisconsin.  West  Virginia,  Connecticut,  and  Massachusetts. 
The  Tax  Commission  of  California  has  presented  to  the  legislature  a 
joint  resolution  calling  for  a  congress  of  States  to  define  a  plan  for  the 
separation  of  Slate  and  Federal  fields  of  taxation,  to  avoid  the  increas¬ 
ing  friction. 

5.  It  will  constitute  a  direct  and  discriminatory  tax  upon  onr  most 
valuable  natior.nl  assets — invention,  initiative,  and  energy.  The  In¬ 
ventor  properly  looks  to  a  high  rate  of  profit  during  the*  life  of  his 
patent  for  his  incentive  and  reward.  The  pioneer  in  -’hipping  or  for¬ 
eign  trade  enterprise  or  new  and  untried  fields  of  industry  likewis* 
looks  to  a  high  return  during  the  period  while  high  risk  obtains  for 
his  inducement  to  risk  his  capital  and  effort.  Unusual  energy  and 
ability  with  a  small  capital  may  produce  much  larger  returns  than 
moderate  energy  and  ability  with  a  much  larger  capital,  and  so  may 
perform  valuable  public  service.  All  these  valuable  public  assets — 
invention,  initiative,  energy,  and  ability — are  penalized  by  the  proposed 
tax. 

0.  It  constitutes  an  unwise  and  unfair  discrimination  against  good 
will,  which  is  not  included  in  the  bill  under  the  heading  of  actual  capi¬ 
tal.  Good  will  is  property.  It  can  be  bought  and  sold.  A  corporation 
which  has  built  up  a  valuable  good  will  has  added  to  its  surplus  prop¬ 
erty,  its  invested  capital,  just  as  truly  as  lias  a  corporation  with  un¬ 
divided  profits  employed  in  the  business.  To  count  the  undivided 
profits,  but  not  the  good  will,  as  capital,  lays  an  unfair  burden  upon 
the  good  will  and  also  penalizes  the  elements  which  enter  into  and  pro¬ 
mote  good  will,  such  as  honesty,  integrity,  special  ability,  or  service, 
which  public  interest  requires  should  be  encouraged. 

7.  Its  collection  will  involve  many  serious  practical  difficulties, 
necessitating  extensive  and  inquisitorial  machinery,  and  lay  an  unduly 
large  Charge  upon  all  corporate  enterprises,  successful  or  unsuccessful. 
In  the  shape  of  extra  reporting  and  accounting.  The  widest  variance 
exists  in  Slate  corporation  laws  regarding  the  different  elements  in¬ 
volved  by  the  proposed  tax.  The  Federal  Trade  Commission  has  said 
that  the  great  bulk  of  business  in  this  country  is  conducted  without  a 
proper  cost-accounting  system,  and  without  proper  cost  accounting 
profits  can  not  be  ascertained.  Multiplicity  of  reports,  increased  and 

firobably  extensive  revision  of  bookleeping,  complicated  and  extensive 
nquisitorial  machinery,  and  wide  latitude  for  inequity,  fraud,  ahd 
evasion  are  all  necessary  parts  of  the  actual  collection  of  the  proposed 
tax. 

All  of  which  is  respectfully  submitted. 

National  Industrial  Conference  Board, 

By  Frederick  P.  Fisn,  Chairman. 

By  Magnus  W.  Alexander,  Executive  Secretary. 

Mr.  WEEKS.  Now,  Mr.  President,  I  am  going  to  state  a  few 
examples  which  I  think  will  demonstrate  some  of  the  criticisms 
I  have  made  against  this  legislation.  Corporations  have  been 
singled  out  as  a  fair  prey  for  the  imposition  of  taxes.  Who 
compose  the  corporations?  Under  the  present  system  very 
largely  they  are  the  people  themselves.  There  are  more  than 
100,(X>0  stockholders,  for  example,  in  the  Pennsylvania  Railroad 
Co.,  and  more  than  100,000  stockholders  in  the  United  States 
Steel  Co.  You  can  no  longer  say  because  a  corporation  is  large 
or  important  it  only  represents  one  or  two  or  a  half-dozen  in¬ 
terests.  It  is  a  means,  when  large  aDd  important  enough, 
through  which  prudent  people  trying  to  save  something  for  their 
old  age  may  safely  invest  their  savings.  It  should  be  our  pur¬ 
pose  to  encourage  such  organizations  if  they  furnish  safe  invest¬ 
ment  facilities  for  those  who  generally  have  not  had  experience 
in  investing  their  money  with  safety,  and  who  are  frequently 
led  to  put  their  savings  in  wild-cat  enterprises  and  lose  them. 
82945— 1705G 


14 


Combination  of  the  capital  of  small  stockholders  is  necessary 
for  the  promotion  and  continuance  of  business  on  a  large  and 
economical  scale  for  the  production  of  the  necessaries  of  life. 

In  order  to  make  great  business  enterprises  attractive  for  in¬ 
vestors  they  must  be  stable  and  profitable. 

The  greater  the  risk,  the  larger  the  profit  ought  to  be.  The 
continued  addition  of  new  taxes  to  the  burden  of  corporations  is 
bound  and  has  begun  to  lessen  the  value  of  the  investment  in 
industrial  enterprises. 

Twenty  years  ago  investment  in  railroad  stocks  was  con¬ 
sidered  most  conservative.  To-day  such  investments  are  invest¬ 
ments  to  be  avoided.  The  trend  of  legislation,  if  followed,  will 
bring  the  same  results  to  industrial  corporations. 

Incomes  of  partnerships  derived  from  agriculture  or  personal 
services  are  exempt  hereunder.  This  certainly  is  not  for  the  pro¬ 
tection  of  the  small  farmer.  It  rather  encourages  combinations 
of  investors  to  control  large  agricultural  interests. 

If  such  an  excess-profits  tax  is  to  be  imposed,  why  should  it 
not  fall  upon  partnerships  controlling  large  areas  and  making 
profits  in  excess  of  8  per  cent?  There  are  many  such  examples. 

It  is  very  frequently  the  practice  for  corporations  located  in 
other  New  England  States  to  maintain  offices  in  Boston.  It  is 
almost  essential  for  them  to  do  so  in  order  to  maintain  their 
own  selling  departments.  Such  a  corporation  located  in  Maine 
would  be  taxed  the  local  city  taxes  and  the  Maine  franchise  tax, 
the  Massachusetts  franchise  tax,  the  city  of  Boston  tax,  the 
Federal  income  tax,  and  the  Federal  capital-stock  tax. 

Almost  exactly  that  same  condition  would  obtain  in  other 
States.  Senators  forget  that  we  raise  a  very  much  greater 
amount  of  revenue  in  all  States  for  local  purposes  than  the 
proportion  of  the  contribution  which  those  States  make  for 
the  support  of  the  General  Government.  We  go  on  levying 
ta^es  in  Washington  as  if  they  were  the  only  taxes  imposed 
against  our  citizens,  when  as  a  matter  of  fact  we  are  fre¬ 
quently  taking  from  the  States  the  only  sources  of  revenue,  or  at 
least  the  main  sources,  they  have,  and  are  piling  up  taxation 
and  indebtedness  in  a  way  which  is  going  to  bring  us  serious 
trouble  unless  we  face  the  situation  and  stop  some  of  the  ex¬ 
travagance.  We  should  adopt  the  budget  system  of  government. 

We  can  not  avoid  enormous  expenditures  in  any  other  way, 
and  it  is  up  to  Congress  to  consider  that  question  without  de¬ 
lay  ;  stop  this  trend  of  unparalleled  expenditures  and  the  im¬ 
position  of  taxes  not  justified  and  in  competition  with  the  taxes 
imposed  by  our  own  States. 

PARTNERSHIPS. 

Take  two  cases:  A  and  B  have  $50,000  each  which  they  in¬ 
vest  in  manufacturing  raincoats — capital,  $100,000.  They  make 
$20,000.  Under  this  bill  their  exemptions  would  be  $5,000  plus  8 
per  cent  of  $100,000,  or  $8,000,  a  total  of  $13,000.  They  would 
pay  a  tax  of  8  per  cent  upon  the  excess  $7,000,  or  $560. 

C  having  $100,000  establishes  the  same  kind  of  a  business 
next  door,  makes  $20,000,  and  is  not  taxed  under  this  bill  be¬ 
cause  he  is  operating  as  an  individual.  The  smaller  investors, 
82045 — 1705G 


15 


who  arc  obliged  to  join  forces  in  order  to  do  business,  are 
taxed  while  the  wealthier  man  pays  nothing  upon  excess  profits. 

A  brokerage  concern  having  a  large  capital  and  making  large 
profits  would  be  exempt  under  the  “  personal-service  **  clause. 

The  success  of  corporations  depends  to  a  great  degree  upon 
the  personal  services  of  their  managers,  and  there  are  many 
instances  where  a  small  capital  plus  valuable  personal  services 
yields  largo  returns  on  the  capital  invested.  These  concerns 
would  lx?  unfairly  and  excessively  taxed  under  this  bill.  Per¬ 
sonal  services  in  a  partnership  are  free  from  tax.  Personal 
services  in  a  corporation  with  perhaps  less  capital  involved  are 
taxed. 

For  the  purpose  of  fixing  the  income  tax  of  corporations  cer¬ 
tain  returns  of  financial  condition  are  demanded  by  the  Gov¬ 
ernment. 

Also  under  the  new  capital-stock  tax  other  returns  arc  re¬ 
quired. 

From  these  the  Government  determines  the  value  of  the 
capital  stock  of  corporations. 

Section  202  of  this  bill  fixes  another  standard  of  value  upon 
which  excess  profits  may  be  determined. 

If  the  Government  determines  the  value  under  the  capital- 
stock  tax  for  purposes  of  taxation-*-and  it  is  presumed  that 
value  thus  determined  is  fair — it  should  accept  its  own  valua¬ 
tion  for  the  purpose  of  determining  what  constitutes  excess 
profits. 

Government  appraisals  of  value  fixed  for  determining  one 
tax  should  be  accepted  as  decisive  and  should  not  vary  in  the 
same  year. 

Business  concerns  to-day  are  hampered  by  the  numerous  re¬ 
quirements  for  returns  and  by  the  arbitrary  demand  of  Gov¬ 
ernment  officials  demanding  changes  in  accounting  and  differ¬ 
ing  methods  of  fixing  valuations.  Uniformity  would  tend  to 
economy  both  in  the  private  and  the  public  service. 

Following  the  same  methods  of  determining  value  in  the 
capital-stock  and  excess-profits  taxes  would  remedy  the  dis¬ 
crepancy  and  discrimination  which  this  bill  raises  and  would 
allow  a  consideration  of  good  will — the  most  valuable  asset  of 
many  partnerships  and  corporations. 

Take  the  case  of  a  newspaper  with  $200,000  originally  in¬ 
vested.  For  10  years  dividends  are  not  paid.  As  a  part  of 
expenses  large  sums  are  paid  out  of  earnings  in  advertising,  in 
increasing  circulation,  in  paying  special  writers.  A  strong  per¬ 
sonality  controls  the  editorial  policy.  The  paper  gains  a  repu¬ 
tation,  a  circulation,  and  at  the  end  of  10  years  is  worth 
$400,000,  a  value  built  on  personal  service  and  the  foregoing  of 
dividends.  Its  presses  and  physical  assets  for  which  cash  was 
paid  may  be  worth  not  more  than  $150,000,  though  the  total 
value  of  the  business  may  be  worth  two  or  three  times  that  sum. 
The  money  earned  and  spent  for  circulation,  advertising,  spe¬ 
cial  writers,  and  so  forth,  has  built  up  a  value  which  the  Gov¬ 
ernment  taxes  under  the  capital-stock  tax,  but  would  decline  to 
consider  under  this  act. 

It  will  thus  be  seen  that  the  bill  operates  to  exempt  personal 
services  ii.  one  case,  but  refuses  to  make  allowance  for  them 
in  another. 

82945 — 17036 


1G 


To  show  i  ho  difference,  take  the  ease  of  a  corporation,  a  part¬ 
nership,  and  an  individual,  each  having  a  capital  of  $100,000, 
which  makes  an  annual  net  profit  of  $50,000  : 


Actual  capital  invested - $100,  000 


Net  profit _  50,  000 

Exemptions  allowable  under  proposed  law  : 

Eight  per  cent  net  protit  on  actual  capital _ $8,  000 

Additional  exemption _  5,  000 

-  13, 000 


Sum  on  which  “  excess-profits  ”  tax  will  be  levied _  37,  000 


“  Excess-profits  ”  tax  of  8  per  cent _  2,  900 

In  the  case  of  a  corporation  there  would  be  an  additional  tax 
of  2  per  cent  on  net  profits  in  excess  of  $5,000,  amounting 
in  the  above  case  to _  900 


Total  tax _  3,  SCO 


Ill  addition  each  partner  in  a  partnership  or  each  stockholder 
in  a  corporation  must  pay  an  income  tax  on  all  income  in  excess 
of  $4,000.  This  income  tax  was  greatly  increased  last  October, 
and  yet  an  individual  conducting  that  business  would  only  have 
to  pay  the  income  tax  which  is  now  a  part  of  the  law. 

Take  the  case  of  a  partnership  or  corporation  in  which  the 
principal  owner  has  secured  a  patent  on  an  invention  and  has 
from  time  to.  time  made  improvements  upon  it.  In  the  course 
of  many  years  it  has  acquired  great  value  through  his  personal 
efforts.  Comparatively  little  cash  has  been  paid  in.  This  value 
is  taxed  under  the  income  tax  and.  capital-stock  tax  laws,  but 
no  credit  is  given  to  it  under  the  proposed  bill,  because  the 
greater  part  of  its  value  does  not  rest  upon  paragraphs  (1),  (2), 
or  (3)  of  the  proposed  section  202.  No  allowance  for  losses  in 
years  immediately  preceding  is  made.  If  it  is  impracticable  to 
go  back  beyond  one  year,  why  not  accept,  for  the  purpose  of 
determining  the  exemption,  the  fair  average  value  of  capital 
assets  for  the  preceding  year? 

Mr.  President,  there  was  called  to  my  attention  the  other  day 
a  case  of  a  corporation  which  has  not  earned  and  has  not  paid 
dividends  for  seven  years,  and  yet  during  the  past  year,  having 
developed  a  quality  and  class  of  goods  for  which  there  was 
great  demand,  it  made  40  per  cent  on  its  capital.  That  is  only 
an  average  for  the  eight  years  of  5  per  cent.  Five  per  cent  is 
certainly  not  an  excessive  profit  for  stockholders  going  into  a 
manufacturing  concern ;  and  yet  under  this  bill  that  corpora¬ 
tion  and  its  stockholders  are  going  to  be  taxed  on  their  propor¬ 
tion  of  the  40  per  cent,  which  really  belongs  to  them,  and 
which  should  and  would  be  reserved  by  any  prudent  concern  to 
try  to  continue  dividends  during  a  term  of  years. 

The  States  have  depended  upon  direct  corporation  taxes  for 
their  revenue. 

The  United  States  Government  is  steadily  encroaching  upon 
this  field  with  its  income,  inheritance,  and  capital-stock  taxes. 

The  logical  result  of  this  Government  exaction  of  taxes  and 
control  of  accounting  and  valuations  will  be  national  incorpora¬ 
tion  laws,  to  which  so  many  States  object. 

Let  me  take  other  examples  showing  the  unfairness  and  in¬ 
adequacy  of  this  law. 

The  Massachusetts  franchise  tax  is  about  1.94  per  cent  of  the 
value  of  the  capital  stock  less  real  estate  and  taxable  property, 
82945—17056 


IT 


l>oth  within  and  without  the  State,  and  the  minimum  of  one- 
tenth  of  1  per  cent  less  local  tax. 

Now,  take  the  three  cases  of  corporations  having,  respectively, 
a  capital  of  $500,000,  $1,000,000,  and  $2,000,000. 


Cases. 

Capital, 
$500,000; 
property 
valued  at 
$300,000. 

Capital, 
$1,000,000; 
property 
valued  at 
$300,000. 

Capital, 
$2,000,000; 
property 
valued  at 
$300,000. 

Property  lax  (local),  about  SIS  per  thous¬ 
and  . 

15, 400 

3,S80 

2,000 

4,800 

$5, 400 

13,510 

2,000 

1,600 

$5, 400 

32,910 

2,000 

Massachusetts  franchise,  tax  1.94  per 
cent . 

Federal  income  tax  of  2  per  cent . 

Eight  per  cent  excess-profits  tax . 

Total . 

16,080 

16.08 

20 

22,510 

22.51 

10 

40,310 

40.31 

5 

Tax  to  profits,  per  cent . 

Earnings  to  capital,  per  cent . 

The  above  is  based  on  the  assumption  that  the  capital  stock 
is  worth  par.  Of  course,  in  the  first  case  with  20  per  cent  earn¬ 
ings  it  would  be  worth  more,  just  as  in  the  third  case  with  5 
I>cr  cent  earnings  it  would  be  worth  less. 

Now,  there  are  three  concerns  earning  exactly  t lie  same  amount 
of  money,  operating  in  the  same  kind  of  business,,  having  dif¬ 
ferent  amounts  of  capital,  and  yet  all  will  be  taxed  differently 
under  this  proposed  law.  That  condition  applies  to  New  Jersey 
as  well  as  to  Massachusetts. 

Taking  a  New  York  corporation,  making  net  profits  of  $100,000, 
the  New'  York  franchise  tax  is  based  on  the  capital  stock  em¬ 
ployed  within  the  State.  If  dividends  of  0  per  cent  or  over  are 
paid,  the  tax  is  one-fourth  of  a  mill  for  each  1  per  cent  of 
dividends  levied  on  each  dollar  of  stock.  If  dividends  are  less 
than  G  per  cent,  or  assets  do  not  exceed  liabilities,  or  stock 
averages  to  sell  below  par,  then  tliree-fourths  of  a  mill  for  each 
dollar  of  capital.  With  dividends  less  than  G  per  cent  and 
assets  exceed  liabilities,  or  stock  averages  above  par,  then  11 
mills  is  the  tax. 

Taking  the  corporations  to  which  I  have  referred  in  the  case 
of  Massachusetts,  one  having  $500,000  capital,  another  $1,000,000, 
an'd  the  third  $2,000,000  capital,  and  earning  profits  of  $100,000, 
the  results  are  indicated  in  the  following  table: 


Capital 

$.500,000, 

dividend 

7  per  cent. 

Capital 

$1,000,000, 

dividend 

5  per  cent. 

Capital 

$2,000,000, 

dividend 

2  per  cent. 

New  Ynrlr  State  franchise  tax . 

$2,625 
5, 100 
2,000 
4,  S00 

$3,750 

5,100 

2,000 

1,600 

$3,000 

5,100 

2,000 

Local  tax  about  $17  (property  $300,000).. 
Federal  income  tax . 

Excess-profits  tax . 

Total . 

14,525 

12,450 

10,101 

In  other  words,  under  this  excess-profits  tax  the  smaller  con¬ 
cern  would  pay  three  times  as  much  as  the  one  twice  as  large, 
82045— 1 7050 


18 


and  the  concern  four  times  as  large  would  pay  no  tax  at  all. 
You  are  not  getting  at  the  kind  of  people  you  think  you  are 
going  to  reach  by  enacting  this  legislation.  To  a  great  extent 
the  very  rich  man  is  going  to  escape  this  taxation,  but  you  are 
taxing  the  small  stockholder  in  all  of  these  corporations. 

One  of  the  features  about  this  that  will  cause  a  great  deal  of 
difficulty  and  cause  a  great  deal  of  unfairness,  and  has  caused  a 
great  deal  of  difficulty  and  is  not  remedied  in  the  old  income 
tax,  is  the  question  of  the  valuation  of  the  depreciation  that 
may  be  allowed. 

In  the  cotton  industry  in  Massachusetts  there  has  been  much 
difficulty  in  this  respect  relating  to  determining  valuation. 
Many  corporations,  such  as  cotton  mills,  some  of  which  have 
been  in  operation  for  nearly  a  hundred  years,  under  the  old 
method  of  bookkeeping  would  carry  perhaps  a  building  worth 
,$200,000  or  $300,000  on  their  books  at  $100,000.  Then  the  ques¬ 
tion  came  up  as  to  how,  when  the  income  tax  came  along,  they 
could  determine  their  valuation  for  the  purpose  of  making  their 
depreciation,  and  an  inspector  from  the  Treasury  Department 
would  come  along  and  say  they  must  change  their  bookkeeping 
methods. 

Another  year  another  inspector  would  come  along  and  find 
something  wrong  in  their  bookkeeping  methods.  Several  of 
the  New  Bedford  cotton  mills,  for  example,  are  now  endeav¬ 
oring  to  work  out  with  the  Treasury  Department  certain  defi¬ 
nite  forms  of  valuation ;  but  the  difficulty  resulting  from  this 
question  of  what  is  a  fair  valuation  of  property  can  easily  be 
seen.  A  mill  which  is  in  successful  operation  is  worth  a  great 
deal  of  money ;  but,  if  it  is  not  profitable  or  if  it  is  closed  down, 
its  real  estate  is  worth  substantially  nothing.  In  New  Eng¬ 
land,  one  of  the  favorite  loans  is  on  real  estate ;  in  fact,  a  con¬ 
siderable  portion  of  savings  banks’  deposits  is  loaned  on  real 
estate  in  Massachusetts ;  but  loans  are  seldom  made  on  manu¬ 
facturing  plants,  because  their  success  depends  so  largely  upon 
the  intelligence  and  ability  of  the  management ;  and  yet  in  this 
bill  we  are  giving  no  credit  at  all  to  such  intelligence  and 
ability. 

Incidentally,  to  show  the  scope  of  this  proposed  law  and  the 
army  of  people  that  will  be  required  to  enforce  it,  producing,  in 
my  judgment,  a  cost  of  collection  out  of  all  proportion  to  the 
amount  of  money  collected,  there  are  306,443  corporations  mak¬ 
ing  returns  to  the  Internal  Revenue  Bureau  now,  of  which 
190,911  were  found  to  be  subject  to  the  income  tax.  Quite 
likely  they  will  also  be  subject  to  the  excess-profits  tax.  The 
Finance  Committee  of  the  Senate  estimates,  I  understand,  that 
there  will  be  50,000  partnerships  that  will  come  within  the 
scope  of  this  law.  I  should  think,  if  the  committee’s  estimate 
had  been  500,000  partnerships  they  would  have  been  a  great 
deal  nearer  right.  I  doubt  if  even  that  will  represent  the  num¬ 
ber  ;  but  if  any  one  can  imagine  the  expense,  the  time,  and  the 
difficulty  of  examining  all  these  concerns,  he  will  readily  under¬ 
stand  that  the  cost  of  carrying  into  effect  this  law  is  going  to 
be  unreasonably  large. 

Here  are  more  examples  to  show  the  unfairness  and  the  un¬ 
evenness  of  the  application  of  the  law. 

Another  instance  which  will  show  the  unfairness  of  this 
excess-profits  tax  is  that  of  John  Wanamaker,  who  is  conduct- 
82945—17050 


19 


ing  an  enormous  business  in  Philadelphia  and  New  York  as  a 
private  individual.  He  will  not  be  taxed  under  the  provisions 
of  this  bill,  and  yet  it  is  probable  that  he  has  one  of  the  most 
profitable  businesses  in  the  United  States. 

In  immediate  competition  with  him  are  many  concerns  in 
every  city  in  the  country,  the  names  of  which  will  come  readily 
to  the  minds  of  any  Senator,  and  they  are  partnerships  or 
stock  companies,  and  they  will  be  taxed  either  as  partnerships 
or  as  corporations. 

Take  another  more  extreme  example:  A  New  York  broker  re¬ 
ported  to  be  close  to  the  administration  stated  recently  to  the 
“  leak  ”  committee  that  he  made  $470,000  because  an  English 
statesman  used  the  word  “  but  ”  in  a  recent  statement.  Not  a 
cent  of  that  $470,000  will  be  taxed  under  this  proposed  law.  If 
the  man  who  profited  by  his  own  cleverness  in  taking  advan¬ 
tage  of  the  situation  which  he  foresaw  had  had  a  partner,  he 
would  have  been  taxed.  No  broker  operating  as  an  individual 
will  be  taxed  under  this  law. 

If  legislation  must  be  passed  along  the  proposed  lines,  then 
I  submit  that  the  tax  of  8  per  cent  should  be  based  on  net  sales 
and  not  on  capital,  as  this  latter  method  would  be  inequitable. 
Owing  to  the  varying  nature  of  business  the  capital  requisite  for 
a  stated  volume  of  sales  varies  widely.  For  example,  it  might 
require  a  capital  of  $100,000  to  produce  sales  of  $100,000  in  one 
line,  and  in  another  line  the  same  capital  might  be  sufficient  to 
produce  a  very  much  larger  volume  of  sales,  say,  for  instance, 
$S00,000. 

With  a  tax  of  8  per  cent  on  capital  as  proposed  the  first-named 
company  would  be  allowed  8  per  cent  profit  on  sales  before  the 
tax  would  apply,  whereas  the  latter  company  would  be  allowed 
only  1  per  cent  profit  on  sales.  Is  this  fair?  This  is  no  fanci¬ 
ful  illustration,  and  I  submit  that  it  clearly  shows  that  net  sales 
and  not  capital  is  the  only  fair  basis. 

The  bill  bears  with  particular  severity  upon  partnerships,  be¬ 
cause  the  net  income  of  such  is  arrived  at  before  distributing 
any  remuneration  to  the  partners  for  their  services,  whereas 
corporations  are  entitled  to  charge  as  expense  the  salaries  paid 
to  the  general  officers.  Moreover,  the  fact  that  a  tax  is  laid 
upon  an  income  over  8  per  cent  on  actual  cash  investment  bears 
heavily  upon  a  partnership  as  compared  with  a  corporation, 
because  the  corporation  may  have  issued  stock  against  intan¬ 
gible  assets,  such  as  good  will,  patents,  and  so  forth,  and  the 
age  of  the  corporation  may  be  such  that  it  will  not  be  practicable 
to  determine  the  actual  cash  invested  in  the  business  except  to 
take  book  values.  In  the  case  of  a  partnership  not  having 
issued  stock,  no  value  has  been  given  to  the  good  will  or  pay¬ 
able  assets  which  they  have  declared  as  a  result  of  the  growth 
of  its  business.  Their  capital  invested  will,  therefore,  stand 
at  the  actual  amount  invested  in  the  business  or  at  the  current 
cash  value  of  tangible  assets. 

Take,  for  example,  two  corporations  engaged  in  cotton  and 
woolen  manufacturing.  A  corporation  owns  its  real  estate  and 
machinery  and  is  capitalized  at  $S0,000.  B  corporation  rents 
its  real  estate  and  machinery  and  is  valued  at  only  $50,000,  and 
yet  it  may  be  a  third  or  a  half  larger  in  its  manufacturing 
capacity.  Suppose  their  profits  are  equal  and  that  they  make 
62045—17056 


20 


$20,000,  of  which  $5,000  is  exempt ;  omitting  the  corporation  tax, 
their  taxes  would  be  as  follows: 

A  corporation,  having  a  taxable  profit  of  $15,000 — $G,400,  being  8 
per  cent  of  capital  or  actual  cash  and  assets  paid  in,  would  have  left 
a  taxable  amount  of  $8,600,  which,  at  8  per  cent,  would  be  $688. 

11  coi’poralion,  having  a  taxable  profit  of  $15,000 — $1,200,  being  8 
per  cent  of  its  capital  or  actual  cash  and  assets  paid  in,  would  have  left 
$13,800,  which,  at  8  per  cent,  would  require  $1,104  for  taxes. 

One  of  the  unfortunate  developments  connected  with  this  leg¬ 
islation,  it  seems  to  me,  has  been  the  palpable  sectional  empha¬ 
sis  given  it  by  those  responsible  for  its  promotion.  The  leader 
of  the  majority  party  in  the  House  of  Representatives,  who  is 
an  old  friend,  and  whom  I  should  hesitate  to  criticize  even  if  the 
rules  and  propriety  did  not  forbid  it,  in  discussing  the  bill 
called  to  the  attention  of  the  country  a  rather  unfortunate  ex¬ 
pression,  which  emphasizes  quite  forcibly  the  attitude  of  the 
Democratic  Party.  He  is  said  to  have  made  this  statement : 

I  think  most  or  the  greater  part  will  be  levied  north  of  Mason  and 
Dixon’s  line.  All  these  fellows  who  live  in  States  that  will  pay  a 
large  part  of  this  tax  can  get  rid  of  the  location  argument  by  remov¬ 
ing  down  to  my  town  of  Scotland  Neck  and  pay  the  tax  from  there. 

I  do  not  know  that  he  made  that  remark,  but  such  state¬ 
ments,  coming  from  a  responsible  source,  create  a  feeling  which, 
I  contend,  is  bad  for  the  country. 

During  the  debate  in  the  House  it  was  suggested  by  those  re¬ 
sponsible  for  the  legislation  in  defending  the  unfair  distribution 
of  the  taxation  iuqxosed  that  certain  of  the  Northern  States 
should  be  willing  to  pay  a  majority  part  of  the  tax  because  a 
large  portion  of  the  money  thus  collected  would  be  expended  in 
those  States,  and  Mr.  Kitciiin  used  this  language: 

Take  the  Fore  River  Co.  in  the  city  of  Boston — 

Meaning,  I  suppose,  the  Fore  River  Co.  located  in  Quincy, 
Mass. — 

that  will  get  more  of  these  appropriations  than  the  entire  South  and 
15  Western  States. 

That  seems  on  its  face  a  reasonable  statement,  and  yet  let  us 
examine  it  from  another  viewpoint  The  last  first-class  battle¬ 
ship  constructed  by  the  Fore  River  plant  was  the  Nevada.  This 
vessel  cost  approximately  $11,000,000,  and  required  three  years 
and  four  months  to  construct.  Under  the  existing  corporation- 
tax  law  the  industries  of  Massachusetts  paid  an  income  tax  of 
$2,858,713  during  the  fiscal  year  1916.  In  three  years  and  four 
months,  the  time  required  to  build  the  Nevada,  those  industries 
under  the  present  law  will  have  paid  approximately  $10,000,000 
in  income  taxes,  an  amount  practically  equivalent  to  the  total 
cost  of  the  Nevada.  In  other  words,  the  industries  of  Massa¬ 
chusetts — and  if  the  personal  income  tax  of  that  State  were 
included  the  figures  would  be  very  much  larger — will  have  paid 
the  National  Government  in  one  form  of  taxes  nearly  enough 
to  pay  the  cost  of  a  battleship  for  the  privilege  of  having  it 
constructed  in  a  Massachusetts  shipyard.  I  think  it  entirely 
possible  that  the  State  of  Massachusetts,  if  it  could  be  relieved 
of  this  tax,  would  be  willing  to  have  the  next  battleship  con¬ 
structed  in  Mr.  Kitceiin’s  State  or  any  other  State  which  is 
not  bearing  a  fair  share  of  the  burdens  of  government. 

Indeed  it  is  not  unreasonable  to  call  to  the  attention  of  the 
Senate  the  fact  that  there  is  no  hesitation  on  the  part  of  States 
in  other  sections  of  the  country,  and  especially  in  the  South,  in 
which  section  the  dominant  party  now  obtains  its  political  power, 
82045—17056 


21 


to  spend  money  collected  in  the  northern  part  of  the  country. 
The  slightest  investigation — and  I  will  not  go  into  it  because  I 
do  not  believe  in  making  sectional  arguments — will  demonstrate 
the  fact  that  the  North  is  paying  on  every  dollar  of  its  wealth 
five  or  six  times  as  much  as  our  Southern  States  and  that  a 
much  larger  percentage  of  the  appropriations  made  by  the  Gov¬ 
ernment  in  proportion  to  the  wealth  of  the  States  goes  to  the 
sections  paying  the  lesser  tax. 

As  I  have  stated,  the  State  of  Massachusetts  paid  $2,S5S,713 
in  corporation  taxes  during  the  fiscal  year  191G,  an  amount 
which  exceeds  by  a  considerable  figure  the  entire  tax  paid  by 
the  nine  Southern  States  of  Alabama,  Florida,  Georgia,  Louisi¬ 
ana,  Mississippi,  North  Carolina,  South  Carolina,  Tennessee, 
and  Virginia.  It  is  estimated  by  the  Democratic  leaders  that 
90  to  95  per  cent  of  the  new  excess-profits  tax  will  be  levied 
upon  the  Northern  States,  so  that  it  is  entirely  probable  that 
the  State  of  Massachusetts,  under  the  proposed  law,  will  pay 
more  toward  the  proper  protection  of  the  country  and  general 
rehabilitation  of  the  Federal  Treasury  than  the  entire  South. 
The  States  of  New  York  and  Pennsylvania  already  pay  many 
times  more  in  Democratic  direct  taxes  than  the  entire  South, 
and  under  the  new  law  the  proportionate  difference  will  be 
even  more  marked. 

I  would  not  raise  this  argument,  Mr.  President,  if  it  had  not 
been  made  in  another  House  and  in  public  discussions.  I  simply 
want  to  point  out  the  facts  as*tliey  bear  on  the  case. 

The  Democratic  leader  in  the  House  contends  that  the  North 
should  be  willing  to  pay  this  great  proportion  of  the  prepared¬ 
ness  expenditures  because  the  demand  for  protection  comes 
from  that  locality.  But  he  does  not  suggest  that  a  sufficient 
tax  should  be  imposed  upon  the  industries  of  the  States  of 
Texas,  New  Mexico,  and  Arizona  to  defray  the  expenditure  of 
.$102,000,000  .n  protecting  those  States  from  incursion  by  Villa ; 
nor  does  he  suggest  that  a  tax  of  $11,000,000  should  be  laid 
upon  the  industries  of  the  State  in  which  will  be  located  the 
armor-making  plant ;  nor  that  $21,000,000  shall  be  imposed 
against  the  State  in  which  the  nitrate  plant  will  be  situated. 
Those  expenses  are  to  be  met  by  the  issuance  of  bonds  which 
the  administration,  no  doubt,  will  expect  the  North  to  purchase 
out  of  any  funds  remaining  after  it  has  paid  all  of  the  other 
Democratic  taxes. 

No  fair-minded  man  would  contend  that  it  would  be  fair  to 
impose  a  tax  of  $162,000,000  upon  the  industries  of  Texas 
merely  because  the  United  States  was  threatened  with  attack 
at  that  particular  point,  and  yet  we  have  found  a  great  many 
prominent  Democrats  ready  to  champion  the  theory  that  the 
North  should  be  made  to  pay  practically  the  entire  cost  of 
national  preparedness  because  it  is  from  there  that  the  country 
would  most  probably  be  attacked.  No  foreign  enemy  will  ever 
declare  war  against  the  State  of  New  York  or  the  State  of 
Pennsylvania  or  the  State  of  Massachusetts.  Such  a  declara¬ 
tion,  if  it  should  ever  come,  would  be  against  the  entire  United 
States,  and  no  section  of  the  country  should  be  exempt  from 
paying  its  proper  share  of  the  cost  of  preparedness  against  such 
a  day. 

The  four  States  of  New  York,  Massachusetts,  Pennsylvania, 
and  Illinois  pay  $30,000,000  of  corporation  taxes,  which  is  over 
82945 — 17056 


22 


one-half  of  the  total  corporation  tax  of  the  country.  The  same 
States  pay  $45,000,000  of  individual  income  taxes,  which  is 
about  two-thirds  of  the  total  income  tax,  and  it  is  undoubtedly 
true  that  the  same  States  will  pay  a  proportional  amount  of  this 
proposed  tax.  The  net  result  of  this  form  of  taxation  is 
extremely  harmful.  Only  330,000  people  directly  pay  an  income 
tax,  which  is  less  than  one-tliird  of  1  per  cent  of  our  population, 
and  a  comparatively  small  proportion  of  the  people  pay  the  cor¬ 
poration  tax  and  will  pay  this  excess-profits  tax  directly.  As 
long  as  one-tliird  of  1  per  cent  of  our  population  are  paying  this 
tax  there  is  nothing  to  prevent  the  other  99§  per  cent  clamor¬ 
ing  for  additional  appropriations,  and  the  average  politician  is 
going  to  listen  with  approval  to  that  clamor.  If  those  who  insist 
on  following  such  a  course  were  honest  enough  to  explain  to  the 
people  that  they  are-  not  standing  their  share  of  this  taxation, 
quite  likely  this  clamor  would  cease. 

In  the  section  of  the  country  which  I  in  part  represent  there 
has  developed  a  frugality  in  saving  money,  and  this  has  been  pro¬ 
moted  by  the  mutual  savings  bank  system,  which  is  one  of  the 
prides  of  Massachusetts  and  contiguous  States.  In  Massachu¬ 
setts  there  are  $928,000,000  deposited  in  savings  banks,  which 
represents  deposits  made  by  2,349,207  depositors ;  in  other  words, 
substantially  two-tliirds  as  many  depositors  as  there  are  people 
in  the  State.  Necessarily  there  are  some  diplications  among 
these  depositors ;  that  is,  a  depositor  may  have  accounts  in  more 
than  one  bank — sometimes  in  several  banks — but  I  think  it  is 
fair  to  assume  that  from  one-third  to  one-half  the  people  of 
Massachusetts  have  deposits  in  the  savings  banks.  Those  banks 
invest  in  real  estate  mortgages  and  in  certain  classes  of  securi¬ 
ties,  like  railroad  bonds  and  other  profit-making  corporations. 
In  many  States  the  laws  surrounding  the  investment  of  savings 
funds  are  not  as  stringent  as  in  Massachusetts.  The  money  of 
some  of  these  banks  may  be  invested  in  securities  directly  af¬ 
fected  by  this  8  per  cent  excess-profits  tax.  Does  anyone  think 
that  if  these  frugal  people,  who  have  saved  between  three  and 
four  hundred  dollars  each,  were  told  they  were  to  be  taxed 
in  this  imprudent  and  unfair  way  in  order  to  maintain  the 
Government,  that  they  would  not  make  a  protest?  The  trouble 
is  that  the  tax  does  not  fall  directly  on  them,  and  they  do 
not  understand  it.  Instead  of  the  clamor  being  against  the 
so-called  rich  corporation  it  would  be  to  protect  the  investments 
of  those  who,  to  a  large  extent,  are  the  wage  earners  and  savers 
of  money  and  who  by  their  owrn  efficiency  are  demonstrating  the 
course  the  Government  should  follow. 

I  ought  to  add,  in  the  case  of  the  Massachusetts  savings 
banks,  that  deposits  are  not  taken  in  amounts  larger  than  $1,000 ; 
and  when  the  deposits  with  accrued  interest  amount  to  $1,600 
the  interest  stops,  which  indicates  the  comparatively  small 
amounts  that  can  be  deposited  by  any  one  person. 

BOND  ISSUES. 

Mr.  President,  it  should  be  a  fundamental  rule  in  govern¬ 
mental  financial  operations  that  all  current  expenses  should 
be  paid  from  the  proceeds  of  the  annual  tax  levy,  and  that  if 
loans  are  issued  their  duration  should  be  within  the  life  of 
the  object  for  which  the  appropriation  is  expended.  The  ex- 
82945 — 17056 


23 


penditures  provided  for  in  this  bill  are  very  largely  of  a  con¬ 
trary  character  to  ordinary  expenses  of  government,  and  it  is 
unfair  to  the  taxpayer  of  to-day  to  require  him  to  provide  for 
Improvements  which  are  going  to  be  equally  beneficial  to  the 
taxpayers  of  future  years.  Therefore  I  have  provided  in  the 
proposed  bond  issue  I  have  introduced  that  it  shall  extend  over 
a  period  of  20  years,  which  is  quite  within  the  life  of  most  of 
the  objects  for  which  the  expenditures  are  made.  I  do  not 
wish  it  to  be  understood,  Mr.  President,  that  I  at  all  approve 
all  of  these  expenditures.  I  voted  against  most  of  them — the 
bill  to  establish  a  nitrate  plant,  the  shipping  bill,  and  others — 
but  I  assume  that  money  is  going  to  be  appropriated  to  provide 
for  the  purposes  for  which  legislation  has  been  adopted,  and 
therefore,  if  that  is  to  be  done,  I  want  it  done  in  this  way. 

The  Alaskan  Railway,  with  ordinary  annual  appropriations 
for  maintenance  of  way,  will  be  in  quite  as  good  condition  20 
years  from  now  as  to-day.  The  life  of  any  ship  which  may  be 
purchased  under  the  existing  law  will  easily  be  from  20  to  30 
years,  and  ships  are  now  performing  good  service  which  are 
much  older  than  the  maximum  limit  I  have  suggested.  Even 
battleships  are  kept  on  the  rolls  as  first-class  ships  for  a  period 
of  about  20  years.  Therefore  substantially  all  of  the  purposes 
for  which  we  are  making  provision  will  be  equally  material  to 
the  people  for  at  least  20  years,  which  is  the  life  of  the  bonds  I 
propose. 

Having  reached  that  conclusion,  another  important  question 
is  to  determine  the  character  of  bond.  The  United  States  Gov¬ 
ernment  has  uever  issued  a  serial  bond.  Its  bonds  issued  after 
the  Civil  War  were  intended  to  be  retired  by  sinking-fund  pro¬ 
visions.  For  many  years  this  policy  was  carried  out  by  using 
surplus  revenues  for  that  purpose,  and  as  early  as  1800  the  debt 
hud  been  reduced  from  about  two  and  a  half  billions  to  sub¬ 
stantially  a  billion  dollars.  No  appropriations  for  the  sinking 
fund,  however,  have  been  made  in  recent  years.  I  presume  one 
reason  for  this  has  been  that  the  estimated  revenues  were  not 
sufficient  to  provide  for  these  appropriations.  Then  another 
problem  has  entered  into  the  question  in  recent  years  of  enough 
importance  to  prevent  the  operations  of  the  sinking  fund.  I 
refer  to  the  necessity  for  bond-secured  circulation  issued  by 
the  national  banks. 

As  time  lias  gone  on  practically  all  of  our  national  debt  has 
been  used  as  a  basis  for  circulation  and  is  being  used  for  that 
purpose  to-day.  The  passage  of  the  Federal  Reserve  act  has 
removed  the  necessity  for  the  continuance  of  issuing  that  kind 
of  circulation.  There  is  no  reason,  therefore.  In  times  of  ample 
revenues,  provided  reasonable  economy  Ls  used,  why  the  entire 
national  debt  should  not  be  paid,  and  I  hope  when  the  present 
difficulties  have  been  passed  that  such  a  course  will  be  con¬ 
sistently  followed.  It  is  not  an  element  of  strength  to  a  coun¬ 
try  to  have  a  considerable  outstanding  indebtedness;  it  is  an 
element  of  financial  and  physical  weakness.  A  country  without 
debt  is  in  much  better  position  to  defend  itself  or  wage  active 
hostilities  than  a  country  which  will  be  embarrassed  by  out¬ 
standing  indebtedness,  and  in  this  respect  alone  the  United 
States  will  be  in  a  position  of  great  strength  as  compared  with 
other  first-class  nations  at  the  end  of  the  present  war. 

82945 — 17050 


24 


Tlie  finances  of  a  municipality,  a  State,  or  a  nation  do  not 
materially  differ  from  those  of  the  private  citizen.  No  private 
citizen  could  acquire  a  good  financial  reputation  if  he  con- 
,  stantly  renewed  his  indebtedness  when  it  matured.  In  other 
words,  if  the  individual  or  copartnership  repeatedly  renews  in¬ 
debtedness,  it  is  taken  as  an  indication  that  they  have  not 
sufficient  capital  to  conduct  their  business  operations  and  their 
credit  is  greatly  impaired.  The  sound  business  concern  is  the 
one  which  borrows  temporarily  and  goes  out  of  debt  at  some 
time  during  its  annual  operations.  The  only  indebtedness  of 
a  relatively  permanent  character  which  is  .justifiable  is  that 
required  in  the  large  extension  of  a  plant,  which  might  be  cov¬ 
ered  by  a  mortgage,  but  that  mortgage  should  be  gradually 
liquidated.  Even  that  kind  of  indebtedness  is  an  embarrass¬ 
ment  to  corporations  if  they  wish  to  go  into  the  market  to 
borrow  for  temporary  purposes.  This  argument  is  equally  ap¬ 
plicable  to  municipalities,  States,  or  nations,  and  most  local 
communities  in  recent  years  have  recognized  the  necessity  of 
extinguishing  indebtedness  by  establishing  sinking-fund  provi¬ 
sions,  which  have  generally  operated  to  carry  out  this  purpose ; 
but,  as  in  the  case  of  our  National  Government,  there  have  been 
frequent  deliberate  violations  of  sinking-fund  requirements. 

A  few  instances  will  illustrate  how  possible  it  is  to  operate 
sinking  funds  honestly  and  yet  not  obtain  the  statistical  results 
which  seem  probable.  As  late  as  1869,  in  England,  a  committee 
of  Parliament  made  an  investigation  of  sinking  funds  and  made 
a  report  to  this  effect :  Between  1785  and  1829  England  bor¬ 
rowed  £330,000,000  at  about  5  per  cent  interest  in  order  to  pay 
the  same  magnitude  of  indebtedness  at  per  cent  interest. 
This  policy  by  which  a  debt  of  per  cent  was  converted  into 
one  of  5  per  cent  meant  an  annual  loss  of  interest  of  £1,627,765, 
extending  over  a  period  of  43  years,  or  a  total  of  nearly  $340,- 
000,000. 

During  our  Civil  War,  the  issue  of  legal -tender  notes  made 
under  the  act  of  Congress  of  1862  was  fortified  with  a  sinking 
fund  of  1  per  cent.  During  the  war  no  attempt  was  made  to 
fulfill  this  pledge,  as  the  Government  was  continually  borrowing 
and  adding  to  its  total  indebtedness. 

For  many  years  the  State  of  Massachusetts  outranked  every 
State  in  the  Union  in  the  magnitude  of  its  State  debt.  Septem¬ 
ber  30,  1913,  its  funded  debt  was  $117,838,412,  and  its  sinking 
funds  at  that  time  were  $34,674,498.  -Incidentally,  the  very 
statement  of  the  magnitude  of  that  sinking  fund  shows  the  im¬ 
portance  of  its  being  well  handled  and  the  difficulty  of  its  be¬ 
ing  entirely  invested  all  of  the  time.  At  this  time  the  gross 
debt  of  the  State,  counties,  municiaplities,  and  metropolitan  dis¬ 
trict  is  practically  $400,000,000.  This  debt  became  so  startling 
that  among  other  phases  of  it  carefully  investigated  and  studied 
the  question  of  the  operation  of  sinking  funds  was  taken  up. 
Although  it  has  been  optional  in  Massachusetts  since  1882  to 
issue  serial  bonds,  this  study  of  sinking  funds  and  their  opera¬ 
tion  was  sufficient  to  bring  about  the  passage  of  an  act  in  1913 
prohibiting  sinking  funds  for  municipal  loans,  making  the  serial 
bond  compulsory  for  all  such  loans  and  requiring  all  such  in¬ 
debtedness  to  be  issued  on  the  same  basis  as  had  been  adopted 
by  the  Commonwealth  in  an  act  passed  in  1906. 

82045—17056 


In  this  respect,  as  in  most  others,  Massachusetts  has  demon¬ 
strated  that  it  is  one  of  the  most  progressive  States.  The  sink¬ 
ing-fund  provision,  as  far  as  Massachusetts  is  concerned,  has 
become  a  dead  letter. 

At  the  constitutional  convention  in  New  York  year  before  last 
this  question  of  a  serial  bond  issue  was  given  consideration.  At 
that  time  there  was  an  indebtedness.  State  and  municipal,  in 
New  York  of  something  like  $2,000,000,000  gross.  Tho  constitu¬ 
tional  convention  unanimously  adopted  the  proposed  change  in 
the  matter  of  issuing  serial  for  sinking-fund  bonds,  and  it 
would  have  become  the  basis  of  procedure  in  that  State  if  the 
constitution  had  not  been  defeated.  1  think  I  should  say,  how¬ 
ever,  that  during  the  consideration  of  this  constitution  and  the 
arguments  relating  to  it  no  objection  was  made  to  this  provision. 

Mr.  NORItlS.  Mr.  President - 

Mr.  WEEKS.  I  yield  to  the  Senator. 

Mr.  NORRIS.  I  am  exceedingly  interested  in  what  the  Sen¬ 
ator  is  now  stating  in  regard  to  the  issue  of  bonds.  It  may  be 
that  in  some  part  of  his  address  he  is  going  to  answer  the  ques¬ 
tion  I  wish  to  ask.  If  he  is,  I  hope  he  will  not  be  diverted  by 
answering  it  now,  but  I  should  like  to  ask  him  to  give  us  this 
information.  In  a  comparison  between  serial  bonds  and  the 
other  kind,  what  has  been  the  result  in  the  way  they  have  been 
sold  on  the  market?  I  mean,  has  there  been  any  loss  in  the 
sale  of  serial  bonds  as  compared  to  other  long-time  bonds? 

Mr.  WEEKS.  I  think  I  refer  to  that  briefly  later  on;  but  I 
will  say  now  that  when  serial  bonds  were  first  issued  there  was 
some  prejudice  against  them  because  they  matured  at  different 
periods,  and  some  of  them  were  too  short  to  be  considered  a 
good  permanent  investment.  In  these  days,  however,  when 
bonds  are  required  to  be  deposited  for  the  protection  of  postal 
savings  banks  deposits,  when  so  many  banks  invest  money  in 
short-term  bonds  and  short-time  notes,  when  the  Federal  re¬ 
serve  banks  could  and  would  buy  them,  I  am  told  by  very  many 
bond  men  whom  I  have  consulted  that  a  serial  bond  sells  as 
readily  as  a  sinking-fund  bond. 

Recently  the  Hon.  Charles  F.  Gettemy,  director  of  the  bureau 
of  statistics  in  Massachusetts,  made  an  investigation  involving 
calculations  of  some  twelve  hundred  municipal  sinking  funds. 
This  investigation  revealed  net  apparent  deficiencies  in  40  cities 
and  towns  aggregating  $1,794,391.5S,  and  net  apparent  surpluses 
in  47  cities  and  towns  aggregating  $2,855,192.47.  This  was  fol¬ 
lowed  by  the  legislation  to  which  I  have  referred. 

Within  a  year  an  investigation  in  New  Y'ork  has  demonstrated 
the  fact  that  the  citizens  of  that  Sate  have  been  taxed  for  sink¬ 
ing  funds  nearly  $19,000,000  in  excess  of  the  amount  required 
under  a  scientific  bond-amortization  plan.  This  situation  is  not 
due  to  any  one  administration,  but  is  the  result  of  the  opera¬ 
tions  of  four  recent  State  governments.  It  was  estimated  that 
this  accumulation  of  unnecessary  money  would  have  amounted 
before  the  maturity  of  the  bond  issues  outstanding  to  $234,- 
000,000. 

Last  year  the  city  of  New  1’ork  made  a  sale  of  $40,000,000 
50-year  4J  per  cent  sinking-fund  bonds  and  $15,000,000  1  to 
15  year  4i  per  cent  serial  bonds.  Mr.  Alfred  D.  Chandler,  of 
Brookline,  Mass.,  to  whom  I  am  indebted  for  much  of  my  in- 
82945 — 1705G 


formation  relating  to  this  particular  subject  and  who  has 
given  it  more  complete  consideration  than  any  person  in  this 
country,  makes  this  comment  on  this  sale  of  bonds.  As  an 
illustration  of  the  difference  in  the  results  obtained  from  sink¬ 
ing-fund  and  serial  bonds,  he  said: 

Such  an  issue  of  sinking-fund  bonds  will  ultimately  cost  New  York 
City  $16,720,320  more  than  if  issued  in  serial  form,  assuming  that  the 
sinking-fund  earnings  would  foi  half  a  century  average  3i  per  cent,  or 
$19,182,200  more  if  the  sinking-fund  earnings  averaged  3  per  cent, 
which  is  the  basis  of  computation  adopted  by  the  State  of  New  York. 

If  the  $40,000,000  4^  per  cent  sinking-fund  bonds  were  exchanged 
into  serial  bonds  at  an  increase  of  £  per  cent,  or  l  per  cent,  or  g  per 
cent,  or  even  ^  per  cent,  the, difference  in  favor  of  the  serials  would  be 
for  the  50  years  as  follows: 


Sinking 
fund,  3  per 
cent  basis. 

Sinking 
fund,  3|  per 
cent  basis. 

As  serials  at  4  J  per  cent . 

$19, 182, 200 
18, 067, 200 
16, 632, 200 
15, 357,  200 
14, 082,  200 

$16,  726,320 

15. 451. 320 

14.176. 320 

12. 901.320 

11. 625. 320 

As  serials  at  4§  per  cent . 

As  serials  at  4J  per  cent . 

\s  serials  at  4§  per  cent . 

As  serials  at  4|  per  cent . 

Mr.  WADSWORTH.  Will  the  Senator  yield  merely  for  me  to 
make  a  comment?  In  the  discussion  of  the  proposed  amend¬ 
ment  of  the  New  York  constitution  having  relation  to  serial 
bonds  taking  the  place  of  long-time  sinking-fund  bonds,  it  was 
estimated  that  were  the  long-term  sinking-fund  bonds  now 
issued  or  having  already  been  issued  by  the  State  of  New  York 
changed  into  serial  bonds,  short-time  bonds,  by  the  time  of  the 
maturity  of  those  bonds,  bonds  issued  it  will  be  remembered  to 
the  amount  of  $100,000,000  for  the  building  of  highways  and 
many  million  dollars  worth  of  canals,  the  State  of  New  York 
would  thereby  save  $40,000,000  in  taxes. 

Mr.  WEEKS.  1  think  I  have  some  figures  here  which  I  will 
give  and  which  will  confirm  the  statement  just  made  by  the 
Senator  from  New  York. 

If  the  State  of  New  York  had  issued  its  50-year  sinking-fund 
bonds,  which  now  equal,  principal  and  accrued  interest, 
$001,071,144,  in  serial  form,  the  total  difference  in  their  cost 
in  favor  of  the  latter  method,  adopting  the  New  York  State 
basis  of  3  per  cent  for  its  sinking-fund  earnings,  would  have 
been  $89,977,262.  If  the  respective  outstanding  bond  rates, 
which  are  3  per  cent,  4  per  cent,  4£  per  cent,  and  4-J  per  cent, 
had  all  been  increased  one-eiglitli  of  1  per  cent  and  the  bonds 
issued  in  serial  form,  the  difference  in  favor  of  the  serial 
method  would  be  $83,339,730.  If  the  rates  had  been  increased 
one-fourth  of  1  per  cent,  the  difference  in  favor  of  the  serial 
method  would  he  $76,525,535.  If  increased  three-eighths  of  1 
per  cent,  the  difference  in  favor  of  the  serial  bond  would  be 
$69,799,970.  If  increased  one-half  of  1  per  cent,  the  difference 
would  be  $63,074,855,  and  even  if  the  sinking  fund  could  earn  4 
per  cent,  l lie  difference  in  favor  of  the  serial  method  would 
range  from  forty  to  sixty-live  millions  of  dollars. 

If  any  other  arguments  were  necessary  to  determine  the  de¬ 
sirability  of  a  serial  over  a  sinking-fund  bond  we  could  find 
impressive  examples  enough  to  justify  the  statement  that  there 
has  been  and  is  the  greatest  recklessness  in  the  management  of 
82945—17056 


27 


sinking  funds.  This  is  not  alone  due  to  the  fact  that  they  are 
not  as  economical  ns  the  serial  method,  but  that  they  frequently 
are  not  used  at  all.  This  contention  is  verified  in  the  case  of 
our  own  Government. 

The  sinking-fund  provisions  applying  to  our  outstanding 
bonds  date  back  as  far  as  1862.  The  law  reads  as  follows: 

Revised  Statutes,  section  3688.  There  Is  appropriated  annually,  out  of 
the  receipts  for  duties  on  imported  merchandise,  a  sum  for  the  payment 
of  the  public  debt  equal  to  the  interest  on  all  bonds  belonging  to  the 
■inking  fund. 

Revised  Statutes,  section  3689.  There  is  appropriated,  out  of  anv 
moneys  in  the  Treasury  not  otherwise  appropriated,  for  the  purpose's 
hereinafter  specified  such  sums  as  may  be  necessary  for  the  same,  re¬ 
spectively,  and  such  appropriations  shall  be  deemed  permanent  annual 
appropriations. 

Kinking  fund.  Of  1  per  cent  of  the  entire  debt  of  the  United  States, 
to  be  set  apart  as  a  sinking  fund  for  the  purchase  or  payment  of  the 
public  debt.  In  such  manner  as  the  Secretary  of  the  Treasury  shall  from 
time  to  time  direct. 

That  law  is  now  on  the  statute  book,  and  yet  no  attention 
whatever  is  or  ever  has  been  paid  to  it,  except  to  apply  to  the 
payn  cut  of  our  indebtedness  the  surplus  revenues  the  Govern¬ 
ment  might  have  from  year  to  year.  This  surplus  was  very 
large  during  the  period  immediately  after  the  Civil  War  and 
for  25  years  thereafter,  and  it  was  in  that  way  that  the  indebt¬ 
edness  accruing  during  the  Civil  War  was  met. 

Public  sinking  funds,  as  I  have  stated,  have  proved  to  be 
too  precarious  for  sound  finances,  notwithstanding  the  estab¬ 
lishment  of  such  funds  in  connection  with  our  municipal,  county, . 
and  State  indebtedness  in  the  United  States.  Scalings  down 
and  interest  defaults  are  reported  to  have  exceeded  a  billion 
dollars,  and  to-day  eight  States  of  the  Union  are  in  default, 
principal  and  fnterest,  to  the  extent  of  more  than  seventy  mil¬ 
lions  of  dollars.  Legislators  have  been  dilatory  and  irrespon¬ 
sive  to  this  subject,  as  is  witnessed  by  the  failure  to  take  action 
by  Congress  itself.  Thirty-one  years  elapsed  in  Massachusetts 
between  the  permissive  and  obligatory  legislation  relating  to 
serial  bonds,  and  only  recently  has  the  second  State  taken  any 
action  on  this  subject. 

The  sinking  funds  of  New  York  State  amount  to  more  than 
$-10,000.000 ;  those  of  New  York  City  to  more  than  $370,000,000. 
Theoretically  such  funds  are  promptly  and  continuously  invested 
to  yield  a  rate  of  interest  above  the  usual  bank-deposit  rates, 
but  actually  millions  of  dollars  of  New  York  City’s  sinking 
funds  are  uninvested,  amounting  recently  to  $25,969, 7G1.  The 
average  uninvested  amount  of  New  York  City’s  sinking  funds 
during  a  year’s  time  has  been  more  than  ten  millions  of  dollars, 
which  means  a  material  loss  of  interest,  and  which,  of  course, 
subverts  the  sinking-fund  principle. 

One  of  the  first  recognitions  of  the  desirability  of  serial  pay¬ 
ments  is  found  in  the  famous  codicil  to  Benjamin  Franklin’s 
will.  In  which  he  left  to  the  cities  of  Boston  and  Philadelphia 
$5,000  each,  contemplating  the  investment  thereof  for  two  cen¬ 
turies,  the  income  in  part  to  be  loaned  to  young  married 
artificers,  who  were  to  repay  “  with  yearly  interest  one-tentli 
part  of  the  principal,”  which  is  exactly  the  serial-bond  method. 

Speaking  of  the  New  York  City  debt,  the  comptroller  of  that 
city  recently  stated  that  a  50-year  $50,000,000  sinking-fund 
loan  would  show  a  difference  between  the  serial  and  sinking- 
82945—17056 


28 


fund  basis  of  $73,663,750  in  favor  of  the  serial  system.  It  lias 
been  carefully  estimated  that  if  $1,000,000,000  of  the  New  York 
City  debt  bad  been  issued  in  serial  instead  of  sinking-fund  form, 
assuming  the  term  to  be  50  years  at  4  per  cent,  the  difference 
in  the  interest  account  between  the  two  forms  would  amount 
to  the  amazing  sum  of  $980,000,000. 

So  definitely  has  the  correctness  of  this  great  difference 
been  worked  out  that  the  mayor  of  Boston  has  recently  peti¬ 
tioned  the  legislature  to  authorize  the  city  of  Boston  to  ex¬ 
change  serial  bonds  for  the  outstanding  bonds  of  the  city  against 
which  there  is  a  sinking  fund,  and  there  is  a  bill  pending  before 
the  Legislature  of  Massachusetts  authorizing  the  Commonwealth 
and  all  municipalities  in  the  State  to  exchange  serial  bonds  for 
outstanding  sinking-fund  bonds. 

In  a  statement  before  a  committee  having  this  matter  in 
charge,  Mr.  Chandler  recently  said : 

“  Of  the  outstanding  $200,000,000  or  more  of  sinking-fund 
bonds  maturing  between  1935  and  1958,  about  $100,000,000  have 
an  average  duration  of  about  30  years.  Assuming  that  only 
one-lialf  of  this  $100,000,000  or  $50,000,000,  are  exchanged  into 
30-year  serials,  the  difference  in  the  interest  account  in  favor 
of  taxpayers  would  be  (assuming  the  same  rates  per  cent  of 
interest)  about  $27,000,000  and  crediting  the  sinking  funds  with 
the  safe  estimate  on  such  long  time  as  earning  31  per  cent, 
the  difference  in  the  actual  cost  to  the  taxpayers  in  favor  of 
.the  serials  would  be  about  $5,250,000.” 

Therefore,  if  the  Massachusetts  indebtedness  had  an  average 
maturity  of  30  years  from  date  and  it  could  be  refunded  into 
serials  bearing  the  same  rate  of  interest,  there  would  be  a 
saving  to  the  taxpayers  of  the  State  on  this  $200,000,000  of 
indebtedness  between  now  and  the  final  liquidation  of  the 
debt  of  about  $21,000,000.  It  is  significant  that  no  opposition 
whatever  appeared  against  this  legislation  at  the  hearing  given 
on  this  subject  by  the  committee  of  the  Massachusetts  Legis¬ 
lature. 

I  have  not  had  the  time  to  figure  the  saving  which  might 
be  made  on  the  present  outstanding  Government  indebtedness, 
if  it  were  refunded  into  serial  bonds.  Indeed,  I  am  not  quite 
sure  I  could  do  this  with  accuracy,  but  I  intend  to  have  it  done 
by  experts  so  that  there  can  be  on  record  a  complete  demonstra¬ 
tion  of  the  desirability  of  changing  our  present  indebtedness 
into  serial  form  and  gradually  liquidating  it.  There  is  no 
reason  why  this  should  not  be  done,  and  from  the  standpoint 
of  business  prudence  there  is  every  reason  why  such  action 
should  be  taken. 

If  that  is  true,  what  a  piece  of  folly  it  would  be  to  issue 
Panama  Canal  bonds  or  any  other  bonds  on  any  other  basis 
than  as  serials.  As  far  as  I  know,  this  subject  has  not  here¬ 
tofore  been  given  any  consideration  by  Congress,  but  it  will 
continue  to  appear  from  time  to  time  until  we  have  taken  some 
action.  At  some  later  date  I  shall  hope  to  submit  to  Congress 
a  complete  demonstration  of  what  may  be  done  with  the 
national  debt  if  such  a  policy  is  followed. 

A  somewhat  careful  investigation  indicates  that  nearly  every 
authority  on  the  issuing  of  bonds  prefers  the  serial  to  the 
sinking-fund  method.  M.  Trinquat,  a  noted  French  writer  on 
this  subject,  stated  in  1S99  the  manifestly  sane  proposition 
82945— 1705G 


29 


that  the  only  way  of  extinguishing  debt,  for  a  State  as  for  an 
individual,  is  to  use  the  revenue  above  the  expenses,  and  that 
when  the  public  frees  itself  from  its  obligation  to  pay  its  debts 
at  maturity  it  encourages  the  incurring  of  new  debts. 

That  is  exactly  wliat  we  are  doing.  We  are  not  paying 
any  of  our  debts.  We  issue  bonds  from  time  to  time  under 
different  forms,  and  when  those  bonds  mature  we  refund  them 
by  issuing  others.  The  Xlebt  will  keep  on  accumulating,  and 
if  we  do  not  take  some  steps  to  liquidate  it  as  it  matures,  at 
least  paying  it  by  annual  installments,  as  I  think  should  be 
done,  we  are  going  to  have  piled  up  a  great  volume  of  indebted¬ 
ness  without  any  prospect  of  its  payment. 

The  French  writer  to  whom  I  have  referred  quotes  Ricardo 
as  saying  that  “  sinking  funds  rather  tend  to  encourage  expendi¬ 
ture  than  to  diminish  debt.”  Another  writer,  speaking  of 
indebtedness,  says  that  a  sinking  fund  “acts  on  the  public  as 
a  narcotic,”  and  “  the  confidence  placed  in  the  efficacy  of  such 
methods  has  contributed  to  ease  the  alarm  which  the  magnitude 
of  the  public  debt  would  otherwise  produce.” 

Mr.  Macl’herson,  a  leading  member  of  the  Institute  of  Char¬ 
tered  Accountants  of  Ontario,  Canada,  recently  in  a  statement 
pronounced  “  the  day  of  the  sinking  fund  as  past,”  and  that 
in  his  judgment  it  was  a  curse  to  the  average  municipality, 
insisting  that  debentures  should  be  issued  on  the  serial  basis. 

Mr.  J.  Hampden  Dougherty,  a  member  of  the  charter  commis¬ 
sion  for  a  new  charter  for  New  York  City,  recently  wrote : 

The  theory  of  sinking  funds  as  security  for  the  payment  of  public 
debts  has  become  obsolete  *  *  *.  The  commission  of  1908  favors 

the  abolition  of  all  sinking  funds. 

And  goes  on  to  argue  that  the  city  debt  of  New  York  should 
be  re-funded. 

While  the  provisions  of  the  sinking  fund  have  been  consid¬ 
ered  an  abundant  safeguard,  experience  has  shown  that  there 
have  been  many  exceptions  to  the  rule.  This  is  particularly 
true  in  the  case  of  railroad  indebtedness,  and  there  have  been 
numerous  instances  of  either  dishonesty  or  ignorance  in  the 
application  of  the  sinking  fund  provisions.  For  example,  I 
have  referred  to  the  fact  that  New  York  City  within  a  few 
years  had  been  taxed  for  sinking-fund  provisions  $19,000,000 
more  than  the  sinking  fund  required.  In  18S0  the  Boston 
sinking  funds  were  despoiled  of  $82,000.  In  1904  a  commission 
reported  that  $292,000  had  been  taken  from  the  Boston  sinking 
funds  to  pay  current  expenses.  In  1909  the  sinking  fund  of  the 
city  of  Lynn,  Mass.,  was  reported  to  be  $400,000  short.  That 
does  not  mean  peculation,  but  that  there  was  not  enough  in 
the  sinking  fund  to  pay  the  indebtedness  by  that  amount  when 
it  matured.  The  funds  in  that  case,  I  understand,  were  used 
for  current  expenses. 

In  the  city  of  Chicago  there  has  been  a  very  general  practice 
of  using  sinking  funds  for  current  expenses.  One  of  the  results 
of  commission  administration  in  Des  Moines,  Iowa,  has  been 
supposed  to  be  its  good  financial  record,  and  yet  an  expert 
analysis  of  Des  Moines’s  finances  recently  made  demonstrated 
a  shortage  in  its  interest  and  sinking  fund  appropriations  of 
$43S,S27.77,  and  the  investors  affirmed  at  that  time  that  the 
new  city  government  had  recently  made  a  levy  which  should 
have  been  5.9  mills  for  this  purpose  but  was  only  2.G  mills. 

82945 — 1705G 


30 


It  can  he  seen  very  easily  why  that  would  be  done.  It  reduces 
taxes  and  gives  that  additional  amount  of  credit  to  those  re¬ 
sponsible  for  levying  the  accessary  taxation  to  carry  on  the 
government.  It  is  charged  that  the  city  administration  has 
systematically  evaded  its  obligation,  and  in  order  to  keep  down 
its  tax  rate  an  insutlicient  amount  has  been  levied  for  sinking- 
fund  purposes. 

One  of  the  few  so-called  authorities  who  has  doubted  the  ad¬ 
visability  of  giving  up  the  sinking  funds  is  a  Mr.  Turner,  a  lec¬ 
turer  at  the  municipal  school  of  finance  in  Manchester,  Eng¬ 
land.  In  Mr.  Turner's  own  illustration  of  the  application  of 
different  methods  of  paying  indebtedness  be  uses  an  example 
of  a  million  pounds  borrowed  for  10  years  and  show's  the  fol¬ 


lowing  results  : 

Total  cost. 

(1)  Installment  method _ £1,275,000 

(2)  Annuity  method - -  1, 295,  100 

(3)  Sinking-fund  method  (5  per  cent  basis) _  1,  295,  100 

(4)  Sinking-fund  method  (31  per  cent  basis) -  1,352,000 


In  other  words,  the  serial  method  produced  the  best  result. 
The  annuity  method,  which  means  paying  off  not  only  one-tenth 
of  the  total  indebtedness  but  one-tentli  of  the  total  interest,  costs 
£20,110  more  than  the  serial  method.  The  sinking-fund 
method,  figuring  the  sinking  fund  at  5  per  cent,  costs  exactly 
the  same  amount ;  but  figuring  the  sinking  fund  at  3£  per  cent, 
the  cost  is  £77,000  more  than  the  serial  method. 

I  wish  to  submit  a  table  showing  the  results  of  the  serial  and 
sinking  fund  methods  in  the  case  of  a  million  dollars  borrowed 
at  3  per  cent  and  4  per  cent,  and  ranging  from  20  to  50  years. 
It  is  a  complete  demonstration  of  the  value  of  the  serial  method. 
I  ask  unanimous  consent  to  insert  herewith  the  statement  to 
which  I  have  referred. 

The  PRESIDING  OFFICER  (Mr.  Lee  of  Maryland  in  the 
chair).  Without  objection,  it  is  so  ordered. 

The  matter  referred  to  is  as  follow's : 

Scrial-hond  anil  sinking-fund  methods  contrasted. 


$1,000,000  at  3  per  cent.  Difference  in  interest  in  fa¬ 
vor  of  serial  bonds. 


$1,000,000  at  4  per  cent.  Dif¬ 
ference  in  interest  in  favor  of 
serial  bonds. 


20  years. 

40  years. 

50  years. 

20  years. 

40  years. 

50  years. 

$285,000 . 

$5 85, 000 

$735, 000 

S3S0, 000 

$7S0, 000 

$980, 00-3 

Difference  in  cost  in  favor  Difference  in  cost  in  favor 
of  serial  bonds.  of  serial  bonds. 


Sinking  fund. 


On  3  per  cent  basis. 
On  3-}  per  cent  basis 
On  4  per  cent  basis. 


20 

years.*  1 

40 

years.* 

63 

years. 3 

20 

years. 1 

40 

years. 2 

50 

years.1 

$19,  426 

$109,199 
51, 791 

$173,305 
111,908 
58, 057 

$114,426 

76,483 

40,231 

$304,199 
246, 791 
194, 765 

$418,305 

356,908 

303,057 

decimal  for  19  years,  and  19  payments. 

1  Decimal  for  39  years,  and  39  payments. 

: Decimal  for  49  years,  and  49  payments. 

82945—17056 


31 


If  the  number  of  payments  were  to  equal  the  full  number  of  years, 
there  woubl  be  an  Increase  over  the  above  In  the  saving  In  favor  of  . 
serial  bonds,  the  ratio  of  such  increase  being  larger  with  the  bonds  of 
a  shorter  term. 

If  both  the  decimal  taken  and  the  number  of  payments  made  each 
equal  the  full  number  of  years,  there  will  still  be  a  large  gain  in  favor 
of  the  serial  bonds. 

Mr.  WEEKS.  The  committee  proposes  to  issue  Panama 
Canal  bonds  without  sinking-fund  or  serial  provisions.  As¬ 
suming  that  the  only  method  the  Government  has  ever  used  in 
issuing  securities — namely,  the  sinking-fund  method — were  fol¬ 
lowed  and  the  bonds  were  issued  for  a  term  of  50  years,  as 
provided  for  in  the  act  authorizing  their  issue,  the  cost  to  the 
taxpayers  of  the  United  States  on  $1,000,000  of  bonds  would 
be  $173,305  more  than  it  would  cost  if  serial  bonds  were  issued. 
It  is  proposed  in  this  bill  to  issue  the  remaining  $222,000,000 
of  Panama  Canal  bonds.  If  the  sinking-fund  method  is  applied 
to  the  payment  of  this  indebtedness — and  of  course  some  method 
must  be  provided  for  liquidating  it  at  maturity  or  sometime 
during  the  life  of  the  loan — the  cost  to  the  taxpayers  of  this 
country  will  bo  $38,473,710,  an  amount  which  justifies  some 
hesitation  In  passing  this  legislation  without  giving  serious 
attention  to  the 'form  of  bond  to  be  issued  and  the  manner  of  its 
payment  at  maturity. 

It  has  been  charged  that  the  serial  bond  is  unpopular  and 
that  it  requires  a  higher  rate  of  interest  than  an  issue  of  bonds 
which  mature  at  one  time,  but  if  that  condition  existed  hereto¬ 
fore,  I  believe  it  has  entirely  disappeared.  There  is  now  a  great 
demand  for  Government  bonds  to  use  as  a  basis  for  postal 
savings  deposits  and  for  short-time  loans  to  be  held  by  the 
banks,  Federal  reserve  as  well  as  others.  An  issue  of  Govern¬ 
ment  bonds  having  one-twentietli  of  its  total  amount  maturing 
within  a  year  would  be  eagerly  picked  up  by  a  great  many  in¬ 
terests  that  have  in  the  immediate  future  a  disposal  of  some 
of  their  funds  for  a  specific  purpose,  but  want  to  keep  them 
employed  until  that  purpose  has  fully  developed.  In  fact, 
there  is  no  latitude  to  the  method  of  liquidating  an  indebted¬ 
ness  issued  under  the  serial  plan.  It  is  safe  for  the  creditor 
and  the  debtor,  and  an  immediate  public  exposure  must  be 
made  if  the  debtor  fails  to  make  provision  for  its  maturing 
obligations.  Incidentally  an  indebtedness  issued  in  this  way 
becomes  safer  as  it  grows  older,  because  each  year  a  portion  of 
it  is  liquidated. 

In  the  hearing  to  which  I  have  referred,  which  recently  took 
place  in  Massachusetts,  three  main  items  of  indebtedness  were 
taken  up — that  is,  the  State’s  contingent  obligation  in  the  metro¬ 
politan  parks,  sewerage,  and  water  loans — and  it  was  demon¬ 
strated  that  the  difference  in  favor  of  issuing  serial  bonds  for 
this  indebtedness,  amounting  to  some  fifty-six  millions  of  dol¬ 
lars  and  having  40  years  to  run,  would  be  something  like 
$2G,000,000,  even  if  the  bond  had  been  issued  in  serial  form  at 
a  one-half  per  cent  higher  rate  than  under  the  sinking-fund 
method.  The  difference  in  the  actual  cost  to  the  taxpayers  be¬ 
tween  the  two  methods  was  shown  to  be  about  $8,360,000  on  a 
3|  per  cent  basis. 

82945 — 1705C 


32 


I  insert  herewith  a  summary  showing  the  indebtedness  to 
which  I  have  just  made  reference,  and  the  possibilities  if  issued 
on  a  3  or  a  3$  per  cent  basis : 


3  per  cent. 

31  per  cent. 

Total. 

Interest. 

Pre¬ 

miums. 

Sewerage . 

$7, 989, 912 
2, 680, 000 
10, 900,  000 

$2, 980, 000 
8, 350, 000 
23, 600, 000 

$10, 969,912 
11,030,000 
34, 500, 000 

$13, 270,  652 
14, 826,000 
45, 532,  875 

$370, 813 
739,160 
2,300, 487 

Parks . 

Water . 

Total,  principal 
and  interest .... 

21, 569, 912 

34, 930, 000 

56,  499, 912 

73, 629,  527 
3, 410,  460 

3, 410, 460 

70,219,067 
56, 499,912 

126, 718, 979 

I  can  not  emphasize  too  strongly  the  fact  that  the  mainte¬ 
nance  of  a  sinking  fund  is  a  source  of  a  great  deal  of  trouble, 
expense,  and  hazard.  The  volume  of  sinking  funds  now  held 
by  the  sinking-fund  commissions  of  the  city  of  New  York  aggre¬ 
gate  several  hundred  millions  of  dollars.  Necessarily,  as  there 
must  be  some  considerable  parts  of  these  funds  uninvested, 
the  possibility  of  errors  and  even  of  dishonest  handling  would 
be  entirely  removed  if  a  serial  form  of  bond  were  issued 
instead.  Our  Government  should  go  out  of  debt,  and  provision 
should  be  made  to  refund  all  Government  bonds  on  a  serial 
basis,  or,  at  least,  reestablish  a  sinking  fund,  so  that  our  bonds 
could  be  paid.  As  a  financial  action  this  should  appeal  to 
every  Senator.  There  is  no  argument  against  it,  and,  from  the 
standpoint  of  good  finances  as  well  as  good  preparedness,  there 
is  no  reason  why  we  should  not  pay  our  indebtedness  promptly 
and  systematically.  If  that  were  done,  there  would  be  no 
trouble  about  our  financing  ourselves  in  times  of  greatest 
stress. 

Finally,  it  is,  perhaps,  sufficient  to  say  that  sinking  funds 
do  not  in  theory  amortize  a  debt;  they  simply  offset  it.  The 
only  true  amortization  is  extinction.  The  only  sensible  method 
of  extinguishing  a  debt  is  to  pay  it  in  approximately  equal 
installments,  which  is  exactly  what  the  serial  bond  does. 

82945 — 1705G 


9 


